Crypto-focused venture capital investment reached $4.65 billion in the third quarter, marking the second-highest amount of activity since the collapse of crypto exchange FTX in late 2022, which significantly impacted venture bets on the crypto industry.
Alex Thorn, head of research at Galaxy Digital, stated in a report on Monday that Q3's venture investments represented a 290% quarter-on-quarter jump and the largest quarter since Q1, which saw $4.8 billion in investments.
"Despite remaining below 2021-2022 bull market levels, venture activity remains active and healthy overall," Thorn said. "Sectors like stablecoins, AI, blockchain infrastructure, and trading continue to draw deals and dollars, and pre-seed activity remains consistent."
This increase in investment activity occurs during a period of lull for crypto venture capital, which had largely withdrawn from the industry following the revelation of FTX's massive fraud in November 2022, leading to the exchange's bankruptcy.
Small Number of Deals Attracted Most Funding
In Q3, a total of 414 venture deals were recorded, with seven of these deals accounting for half of the capital raised during the quarter.
Notable investments included financial technology company Revolut, which attracted $1 billion, crypto exchange Kraken with $500 million, and crypto-focused US bank Erebor with $250 million.
Established companies, those founded in 2018, secured the majority of the capital raised. In contrast, companies founded in 2024 accounted for the highest number of deals.
"Pre-seed deal count as a percentage has trended down consistently as the overall industry has matured," Thorn commented.
"With crypto being adopted by established traditional players, and a large cohort of venture-backed firms having found market fit, it’s increasingly likely that the golden era of pre-seed crypto venture investing has passed."
VC Capital Stagnates as ETFs and Crypto Treasuries Take Focus
Previous bull runs in 2017 and 2021 showed a high correlation between venture capital activity and liquid crypto asset prices. However, Thorn noted that for the past two years, activity has been more subdued even as prices have risen.
"The venture stagnation is due to a number of factors, such as waning interest in previously hot crypto VC sectors like gaming, NFTs, and Web3; competition from AI startups for investment capital; and higher interest rates, which disincentivize venture allocators broadly," he elaborated.
Spot exchange-traded products (ETPs) and digital asset treasury companies (DATs) may be diverting investor interest from crypto.
Significant investments in spot-based Bitcoin ETPs by large institutional investors, such as pension funds and hedge funds, suggest that some capital may be gaining exposure to the sector through these large, liquid vehicles instead of early-stage venture capital investing, Thorn explained.
Macroeconomic trends also continue to present challenges for allocators. However, Thorn anticipates that shifts in the regulatory environment could lead to a resurgence of allocator interest in the space.
US Saw Most Crypto VC Activity
During the third quarter, 47% of the invested capital was directed towards companies headquartered in the United States. This compares to 28% in the United Kingdom and 3.8% in Singapore. The US also accounted for 40% of the deals completed, followed by Singapore with 7.3% and the UK with 6.8%.
Thorn pointed out that despite a previously challenging regulatory environment, the US has historically accounted for the most deals and capital invested. He expects this trend to persist under the crypto-friendly Trump Administration.
"We expect US dominance to increase, particularly now that the GENIUS Act is law and especially if Congress can pass a crypto market structure bill, which would further entice traditional US financial services firms to enter the space in earnest."