Why Venture Capital Lags Behind Bitcoin’s Growth
Venture investments in crypto startups increased by 28% in Q2 2024, reaching $3.19 billion. According to Galaxy Digital, founders and investors reported more active fundraising than in previous quarters.
“Sentiment toward venture capital in crypto continues to improve, though levels remain significantly below the 2021-2022 bull market,” said Alex Thorn and Gabe Parker from Galaxy Digital, quoted by The Block.
Rising Investment and Valuation
Not only did the deal volume grow compared to Q1, but the average investment size also rose from $3 million to $3.2 million. The average pre-investment valuation jumped from $19 million to $37 million, analysts noted.
Galaxy analysts believe that crypto companies are in a favorable position due to increased industry interest. The competitive blockchain startup environment allows creators to secure larger amounts during negotiations, giving them more leverage over venture firms.
“This indicates that despite a lack of available investment capital compared to previous peaks, the recent crypto market revival leads to significant competition and FOMO among investors,” Galaxy noted.
Increased Deal Volume
The number of deals also increased by 8%, from 682 in Q1 to 739 in Q2. This is slightly below the record 775 deals in Q2 2022, according to The Block. However, Coindesk reported a decrease in deals from 603 to 577 during the same period.
Experts suggest that if this growth pace continues, 2024 could approach record levels of invested capital and deal numbers seen in 2021 and 2022.
U.S. Dominance and Potential Shifts
The report indicates that the U.S. continues to dominate in deal numbers and invested capital. However, this might change. Thorn and Parker mentioned that regulatory hurdles could force more companies to move abroad. If the U.S. wants to remain a tech and financial innovation hub, policymakers must understand how their actions or inactions impact the crypto ecosystem.
Where Venture Capital is Investing
In the past three months, the biggest venture deals involved blockchain Monad ($225 million led by Paradigm), social platform Farcaster ($150 million led by Paradigm), and blockchain Berachain ($100 million led by Brevan Howard Digital and Framework Ventures).
In Q1 2024, venture capital focused on restaking protocols, cross-ecosystem blockchain solutions, and decentralized exchanges (DEX) with derivative support. Q2 trends shifted towards the Bitcoin ecosystem.
A notable startup in this new Bitcoin trend is the BTC staking protocol Babylon, which raised $70 million led by Paradigm. Bloomberg’s Muyao Shen commented that if Babylon’s concept succeeds, Bitcoin staking could become as common as staking other cryptocurrencies.
Bitcoin uses Proof-of-Work and cannot be staked like Ethereum or Solana, which use Proof-of-Stake. Staking earns native coins for locking deposits.
Growth in Layer 2 Solutions
Investments in Bitcoin layer 2 solutions (L2 networks) grew by 174% from Q1, reaching $94.6 million. Investors are excited about more use cases for Bitcoin’s transaction blocks, potentially attracting DeFi and NFT models, wrote Thorn and Parker from Galaxy.
Bitcoin’s Ecosystem and Price Influence
Some experts see Bitcoin not just as a value storage tool. They believe developing a smart contract application ecosystem on Bitcoin could positively impact its price.
Galaxy noted that most invested capital in the reported quarter went to early-stage funding, comprising 78% of total investments. While late-stage companies struggle to attract capital, this could benefit the crypto market long-term.
Investments and Bitcoin Price Correlation
Like in Q1, there is no correlation between Bitcoin’s price and venture investments in crypto startups. Previously, it was assumed that venture investments correlated with Bitcoin’s price. For example, a lack of BTC price growth might mean funds would be cautious and selective in crypto investments.
Galaxy’s report confirms that the multi-year correlation between Bitcoin’s price and venture investments broke this year. “While BTC rose significantly since the beginning of the year, invested capital remains much lower than levels seen when BTC last traded above $60,000 in 2021-2022.”
Galaxy suggested that catalysts like Bitcoin-ETF, crypto startup bankruptcies, regulatory uncertainty, and macroeconomic hurdles contributed to this divergence. However, analysts predict that further Bitcoin price growth could increase venture capital activity in the latter half of the year.
