VC Firms Increase Crypto Investment in 2024 But the Broader Picture is Different

August 10, 2024

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The crypto industry has always stood out for its unique dynamics, particularly when it comes to venture capital (VC) investment. The strong returns from established cryptocurrencies like Bitcoin and Ethereum allows venture capitalists to bypass some of the more speculative ventures that typically characterize early-stage investments. This unique aspect of the crypto market has been noted by Adam Cochran, a partner at Cinneamhain Ventures.

Slow Investments Compared to 2022

In 2024, crypto venture capital funding has shown resilience, surpassing the $1 billion mark in three separate months—March ($1.09 billion), April ($1.04 billion), and July ($1.01 billion), according to data from RootData. These figures represent a notable uptick compared to the previous year, where the $1 billion threshold was only crossed once, in November 2023, with a total of $1.29 billion.

However, despite this growth, the current levels of funding are still a far cry from the heights of 2022, when the first four months of the year each saw over $4 billion in crypto VC funding per month.

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Possible Reasons

Cochran, in a series of posts on the social media platform X, discussed the nuanced reasons behind the slowdown in VC investment in the crypto sector. He explained that most VC firms are backed by Limited Partners (LPs) who prioritize returns that outperform traditional index funds.

In this context, the medium-term prospects of holding assets like Bitcoin and Ethereum are highly appealing, as they offer returns that can easily outpace those of the S&P 500 index.

Rather than rushing into risky, early-stage investments, VCs can afford to remain patient, holding onto the top two crypto as a safer bet. Cochran pointed out that in other industries, VCs are more inclined to take early risks because they lack the passive gains that Bitcoin and Ethereum provide. In contrast, the crypto sector allows them to sit on the sidelines with these established assets, reducing the need to engage in speculative early-stage ventures.

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A Ray of Hope

During the last crypto cycle, which spanned from 2020 to 2024, VC firms appeared to be actively investing, but much of this activity was focused on applications that had already proven successful. Cochran noted that these firms were hoping to capitalize on the late stages of consumer adoption, making up for missed opportunities by investing in projects that had already gained traction.

The broader landscape of crypto VC investment has also been marked by legal challenges. Last year, eighteen major VC firms, including Temasek and Sequoia Capital, were implicated in a class-action lawsuit. The lawsuit accuses these firms of using their influence and financial resources to propel the now-defunct cryptocurrency exchange FTX to its multibillion-dollar valuation, ultimately contributing to its collapse.