Venture capital (VC) investments in crypto and blockchain startups has experienced a significant decline in the third quarter of 2024 (Q3).
The decline is with a 20% drop in the total value of deals.
The decline has been attributed to the growing popularity of bitcoin exchange-traded funds (ETFs), which are offering investors a more straightforward and liquid way to gain exposure to the crypto sector.
According to the latest report from Galaxy Research, approximately $2.4 billion was invested in 478 crypto and blockchain deals during Q3.
While both the U.S. dollar value of funds and the number of financed startups decreased by 20% and 17%, respectively.
The report highlights a major shift which states:
“Large investors are gravitating toward bitcoin ETFs as they prefer liquid, regulated vehicles over the riskier early-stage VC investments.”
Meanwhile, it was observed that the approval of bitcoin ETFs has led to a surge in investor interest, potentially pulling funds away from the earlier-stage crypto startups that had previously dominated the sector.
The Galaxy Research report also noted that 85% of the VC investment in Q3 went to early-stage companies, with the remaining 15% directed at later-stage firms.
“Crypto-native funds still have access to capital from larger raises over the past few years, and their connection to entrepreneurs allows them to identify new opportunities in the sector,” the report added.
Despite the downturn in investment volume, valuations and deal sizes for crypto startups have risen sharply since the second quarter of the year (Q2).
“Crypto appears to have rebounded more sharply than other sectors, reaching the highest levels since 2022.”
Interestingly, while VC deals in Web3, NFTs, and gaming plummeted by 39%, investments the AI-driven crypto startups surged 5x quarter-over-quarter.
“The surge in interest for AI-linked crypto projects signals that investors are shifting focus to more innovative and transformative technologies,” the report said.
In terms of specific investment areas, companies in the Trading/Exchange/Investing/Lending category received the most VC capital, raking in $462.3 million.
Major beneficiaries included Cryptospherex, which secured $200 million, and Figure Markets, receiving $73.3 million.
The United States maintained its dominance in the crypto VC space, with companies headquartered in the U.S. accounting for 43.5% of all deals.
Singapore is next with 8.7%, while the United Kingdom, UAE, and Switzerland made up the rest of the top five.