Crypto VC Funding Drops 20% in Q3, Market Leaves Mid-Tier Projects Behind

The crypto VC (venture capital) market took a noticeable hit in the third quarter of 2024, with funding falling 20% to $2.4 billion, according to a report by Galaxy Digital. The decline highlights a “barbell market” trend where Bitcoin and high-risk memecoins have attracted the most attention, leaving mid-tier projects struggling to secure investment.

Bitcoin ETFs and Memecoins

The report, authored by Galaxy’s head of research Alex Thorn and analyst Gabe Parker, revealed that the number of deals also fell by 17%, with 478 agreements sealed in Q3. The $2.4 billion invested represents a 21.5% increase from the previous quarter, yet the overall investment climate remains subdued.

Much of this stagnation is attributed to Bitcoin’s spotlight, especially with the introduction and rising demand of spot Bitcoin ETFs. The speculative rise of memecoins, which are notoriously risky and challenging to fund, also added to this slowdown.

Investors have shown little interest in mid-tier projects, leading to minimal funding in that space. Instead, the investment climate favored a “barbell” approach—where the focus is on high-market-cap assets like Bitcoin and more speculative tokens such as memecoins—leaving mid-sized utility tokens largely overlooked. This shift has kept large allocators, such as pension and hedge funds, mostly disengaged from early-stage crypto VC investing.

Crypto VC Market Faces Weak Allocator Interest

The Galaxy report also pointed out that the longstanding correlation between Bitcoin’s price and crypto VC funding has broken down, as weak allocator interest and market narratives have favored Bitcoin, leaving out once-popular themes from 2021. The focus on spot Bitcoin ETFs, in particular, has diverted attention from early-stage venture capital investments in crypto, contributing to the divergence.

While Ethereum has seen limited demand for spot ETFs, there is potential for increased adoption to pull further VC interest away from native decentralized finance (DeFi) projects. However, early-stage deals remain a bright spot in the VC landscape, capturing 85% of Q3’s capital. Key sectors like crypto exchanges, trading firms, and companies developing layer-1 blockchains saw the most funding.

Artificial intelligence (AI) also gained substantial ground in the crypto world, with firms such as Sentient, CeTi, and Sahara AI raising $85 million, $60 million, and $43 million respectively.

Looking ahead, Galaxy predicts that falling interest rates could drive a resurgence in VC funding, especially as the market adapts post the Terra collapse.