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Galaxy Ventures laments ‘challenging’ market as crypto VC funding set to earn paltry 27% return – DL News
- Investments in crypto projects are increasing.
- However, VCs and industry insiders see several reasons why it will not reach bull market levels in 2024.
- And Joe Biden’s stay in the White House is just one of them.
Venture capital investments in crypto projects will reach $12 billion in 2024 – just a 27% increase from the $9.4 billion raised last year, even as Bitcoin surged to a new record.
That’s according to PitchBook crypto analyst Robert Le.
“The pace of investment will continue to grow, but not at the pace we saw in 2020, 2021,” Le said DL News.
VC sentiment is often seen as a weathervane for the industry.
This sentiment is adding to the downside among industry insiders, who have reported it DL News that their hopes are fading and that Wall Street’s commitment to digital assets could spark another bull run.
Sticky inflation, uncertain regulations and the ghost of past scandals create a pessimistic outlook.
Scandals
According to PitchBook, cryptocurrency investments fell nearly 70% from 2022 to $9.4 billion in 2023.
DefiLlama data confirms the picture.
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“The last few years in venture capital have been really challenging,” said Mike Giampapa, general partner at Galaxy Ventures DL News.
Scandals including the collapse of FTX and the Earth accident – and their resulting lawsuits and criminal charges – have curbed investors’ appetites, Le said.
Many major generalist investors who were burned by their previous cryptocurrency investments have yet to return, which has kept the total low, Le said.
Inflation
VC appetite is also influenced by the price of cryptocurrencies. If Bitcoin skyrockets, investor sentiment also goes up, Le said.
While cryptocurrencies have rallied this year thanks to the launch of several Bitcoin exchange-traded funds by Wall Street giants like Black rocksticky inflation kept the rally contained.
It’s basic economics. High inflation means retail investors have less money to spend on riskier assets like Bitcoin.
With the Federal Reserve keeping interest rates high for the time being, there is less chance of a surge in cryptocurrency prices, which in turn means venture capital investments will remain modest.
On the other hand, if the US central bank were to cut interest rates, cryptocurrencies would likely rise, which could see venture capital investments rise 60% quarter-on-quarter, bringing the total for the year to around 21 billion dollars, Le said.
Great politics
Donald Trump AND Joe Bidenwho both seek a second term in the Oval Office, have positioned themselves on opposite poles of the argument.
Trump is more supportive, while Biden has adopted an anti-crypto stance similar to that of the chairman of the Securities and Exchange Commission Gary Genslerwho harshly cracked down on the sector during his tenure.
The outcome of the elections will also influence VC sentiment.
A Republican administration could be more supportive of the crypto ecosystem and mean Gensler would leave office, although Gensler could leave regardless of how the election goes, Giampapa said.
A more favorable SEC presidency would lead to more crypto startups growing and exiting, such as through public listings, which allow investors to cash in on their investments, he said.
Le noted that traditional releases dropped from 81 in 2021 to 73 in 2023.
“This isn’t just about cryptocurrencies — it’s just about the tech market in general,” he said.
This figure does not cover alternative exits in the form of token launches, which allow VCs to profit from their investments.
Hope
To be sure, there are glimmers of hope for VC investing, with several firms claiming to be far from idle.
Furthermore, Le’s latest report shows that venture capital investments in the sector rose to $2.4 billion in the first quarter, an increase of 40% compared to the last quarter of 2023.
“We invest across all market cycles and take a long-term view of the space,” said Shan Aggarwal, vice president, business and business development at Coinbase Ventures. DL Newsadding that “we have been very active in the second half of 2023.”
Le noted that many companies have a lot of dry powder.
“They can’t sit on those funds and collect management fees forever.”
Additionally, several cryptocurrency-focused VCs are raising new funds to put into the market.
For example, Paradigm is reportedly in talks to raise a new $750 million fund Bloomberg.
Le also noted that while most general investors have not returned to cryptocurrencies so far, their crypto teams have spent the bear market learning more about the sector.
“When we are in a full-blown bull market, they will come back,” he said.
Aggarwal echoed this sentiment: “2024 is shaping up to be a very active year for crypto VC and we will need to balance speed and agility to keep pace with the market, while remaining disciplined in our investment heuristics and capital allocation.”
Eric Johansson is the news editor of DL News. Do you have advice? Send him an email at eric@dlnews.com.
This story has been updated to correct a typo in previous copy that suggested VCs would invest 2.4% more in cryptocurrencies in 2024 compared to 2023. The correct figure is that they would invest 24% more, according to Le’s estimates.