The Return of Cryptocurrency Venture Capital

Hello and welcome to the FT Cryptofinance newsletter. This week, we’re looking at the state of cryptocurrency fundraising.

Cryptocurrency startups looking to raise money have had a tough time in recent years. They’ve faced lukewarm demand from investors fearful of getting burned again after cryptocurrency companies, stock valuations, and token prices collapsed in 2022.

Now, however, the clouds seem to be slowly clearing.

Investments by venture capitalists and others in cryptocurrency companies rose to $3.2 billion in the second quarter of this year, the highest amount in a three-month period since 2022, up from $2.5 billion in the first quarter, according to Galaxy Research.

The numbers are good news for digital asset companies, and underscore how bitcoin’s surge this year has brought renewed enthusiasm for the sector and made investors more willing to open their wallets.

Despite a recent dip to around $58,000, bitcoin is still up 34 percent this year, a bigger gain than the benchmark S&P 500 index, helped by the approval of spot bitcoin ETFs in January.

The average deal size this year is also slowly rising, from $3 million in the first quarter to $3.2 million in the second quarter, according to Galaxy Research. But what’s more astonishing is the jump in company valuations. Median pre-money valuations, or the value before a company receives funding from investors, have increased from $19 million to $37 million, highlighting how companies are positioning themselves and are back on the rise.

In a potential sign of a return to the market’s past froth, companies in the web3, NFT, metaverse and gaming sectors raised the most money from investors in the second quarter of this year, Galaxy said, while infrastructure companies came in second. Lest we forget, the metaverse AND NFT were two of the most hyped sectors and where valuations were quickly reduced during the cryptocurrency crisis.

The intersection of cryptocurrency and AI has also been a remarkably active, if disconcerting, area, as some companies have targeted the much-hyped artificial intelligence space, such as by claiming that they will somehow combine the uses of blockchain and AI. This comes as raising funds is proving much easier, as investors seek to grab a slice of the AI ​​boom.

In a sign of this interest, the blockchain-based artificial intelligence company Sentient LabsFounded just this year, it raised $85 million from Pantera Capital, Peter Thiel’s Founders Fund and other investors this month.

Meanwhile, cryptocurrency investors have also begun actively raising new funds.

California-based venture capital firm Paradigm recently raised $850 million for its third crypto fund, while cryptocurrency trading firm Auroras has created a new venture capital division and plans to invest $50 million in digital asset startups.

But there could be problems for some investors.

Ari Paul, chief investment officer at BlockTower Capital, said the U.S. Securities and Exchange Commission is eyeing crypto venture capitalists as its next target. Speaking on a podcast, he said the regulator has launched a “series of investigations into VCs for acting as unregistered securities dealers.”

Perhaps the clouds of the last few years have not yet completely passed.

What do you think about the cryptocurrency fundraising environment? Email me at nikou.asgari@ft.com

Highlights of the week

• Former FTX executives Nishad Singh and Gary Wang are set to be condemned later this year. Both pleaded guilty to fraud.

• Tulip Siddiq has been appointed as the UK’s new City minister, tasked with overseeing cryptocurrencies.

• Standard Chartered-backed Zodia Markets is in talks to acquire Billionaire Alan Howard’s Elwood Capital, Bloomberg revealed.

• The German state of Saxony is sale bitcoins seized during criminal investigations.

Data extraction

PayPal was the first major traditional financial institution to invest heavily in cryptocurrency payments when launched its stablecoin PYUSD last year.

His investment in cryptocurrency at a time when many traditional firms were still cautious appears to be paying off. PYUSD’s market cap jumped 84 percent last month, according to CCData, to $500 million, after expanding to be used on Solana, as well as Ethereum.

Cryptofinance is edited by Laurence Fletcher. Your comments are welcome

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