July 4 Crypto News – Crypto VC Sentiment on the Rise Despite Market Slowdown, Says Galaxy Digital

July 4 Crypto News – Galaxy Digital: Crypto Venture Capital Optimism Persists Amid Market Stagnation

July 4 Crypto News – Despite a market slowdown, crypto venture capital investment continued to bounce back in Q2, with founders and investors reporting a more vibrant fundraising environment compared to earlier quarters, according to Galaxy Digital.

“Crypto venture capital sentiment keeps improving, even though it’s still significantly below the peaks of the 2021-2022 bull market,” wrote Galaxy Digital research analysts Alex Thorn and Gabe Parker in a Tuesday report shared with The Block.

Galaxy Digital noted that venture capitalists poured $3.19 billion into crypto and blockchain-focused companies in Q2, slightly up from $3.16 billion in Q1, aligning with The Block Pro’s funding dashboard. The median deal size also saw a slight increase from $3 million to $3.2 million. Interestingly, the median pre-money valuation surged to near record highs, jumping from $19 million to $37 million quarter-over-quarter, according to the analysts.

“With generalist venture capitalists still largely on the sidelines, crypto-focused VCs are facing a more competitive landscape, giving founders more leverage in negotiating terms,” they added. “This suggests that despite the reduced availability of investment capital compared to previous peaks, the recent resurgence in the crypto market is driving significant competition and a fear of missing out (FOMO) among investors.”

The number of total crypto venture deals rose 8%, from 682 in Q1 to 739 in Q2, per The Block Pro’s funding dashboard. This is just shy of the record 775 deals in Q2 2022. “If this pace continues, 2024 could see the third-highest investment capital and deal count, behind only 2021 and 2022,” the analysts projected.

Web3, Layer 1s, and Bitcoin Layer 2s Lead the Charge

In Q2, Web3 was the top venture funding category, attracting $495.5 million, according to The Block Pro’s data, driven by a $150 million raise for the web3 social media platform Farcaster, Thorn and Parker said. Layer 1s secured $371 million in funding during Q2, led by Monad’s $225 million and Berachain’s $100 million deals.

Bitcoin Layer 2 projects also saw significant investment in Q2, raising $94.6 million, up 174% quarter-over-quarter, according to Galaxy. “Investor excitement remains high about more composable blockspace in the Bitcoin ecosystem, which could bring models like DeFi and NFTs back to Bitcoin,” Thorn and Parker said. “Our internal research indicates there are at least 65 projects identifying as ‘Bitcoin Layer 2s.'”

Overall, early-stage deals dominated the quarter, accounting for 78% of the total investment capital, while pre-seed deals represented 13%, according to Galaxy’s data. “The ongoing interest in early-stage deals is a positive sign for the long-term health of the broader cryptocurrency ecosystem. While some later-stage companies struggle to raise capital, entrepreneurs are finding willing investors for new, innovative ideas,” the analysts noted.

U.S. Regulatory Challenges and Their Impact

However, the U.S. maintained its lead in the number of deals and capital invested, but regulatory hurdles might push more companies abroad, Thorn and Parker suggested. “Policymakers need to be aware of how their actions or inactions could impact the crypto and blockchain ecosystem if the U.S. wants to stay at the forefront of technological and financial innovation over the long term.”

The Bitcoin Price and Venture Capital Investment Correlation

The historical correlation between bitcoin’s price and venture capital investments has broken down this year, with the latter struggling to keep pace, the analysts observed.

Bitcoin and the broader crypto market started the year strong but lost momentum in Q2 after bitcoin hit its latest all-time high of $73,836 on March 14, and subsequently traded in the $60,000 to $70,000 range.

Currently, bitcoin is trading at $60,117, up 43% year-to-date but down 12% in Q2, according to The Block’s bitcoin price page. Meanwhile, the GMCI 30 index, which tracks the top 30 cryptocurrencies, has gained 30% year-to-date but fell 18% in Q2.

“Although BTC has risen significantly YTD, the capital invested remains far below the levels seen when BTC last traded above $60k in 2021-2022,” the analysts noted, citing potential catalysts like Bitcoin ETFs, crypto startup bankruptcies, regulatory challenges, and macroeconomic headwinds as factors for this divergence.

However, “allocators may be gearing up for a return due to the resurgence of liquid crypto, which could boost venture capital activity in the latter half of the year,” they concluded.

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