Cryptocurrency-focused venture capital reached $4.65 billion in the third quarter, marking the second-highest level since the collapse of the cryptocurrency exchange FTX at the end of 2022, which severely impacted crypto venture capital bets.
Alex Thorn, head of research at Galaxy Digital, stated in a report on Monday that venture capital bets in the third quarter surged 290% quarter-over-quarter and represented the largest single quarter since the first quarter, when investments totaled $4.8 billion.
Amid a downturn in crypto venture capital, investment activity is on the rise. Since the massive fraud scandal involving FTX in November 2022, which led to its bankruptcy, crypto venture capital has largely withdrawn from the industry.
There were a total of 414 venture capital deals in the third quarter, with 7 deals accounting for half of the total fundraising for the season.
These include $1 billion invested in fintech company Revolut, $500 million in cryptocurrency exchange Kraken, and $250 million in Erebor, a U.S. bank focused on crypto.
Meanwhile, mature companies established in 2018 accounted for most of the fundraising, while companies founded in 2024 contributed the most deals.
"As the overall industry matures, the proportion of Pre-seed stage deals has continued to decline," Thorn noted.
Previous bull markets in 2017 and 2021 showed that venture capital activity is highly correlated with the prices of liquid crypto assets, but Thorn stated that despite price increases over the past two years, activity has been more subdued.
He added, "The stagnation in venture capital stems from multiple factors, such as waning interest in previously popular crypto venture sectors (like gaming, NFTs, and Web3); competition for funding from AI startups; and higher interest rates, which broadly weaken the willingness of venture allocators."
Spot-based exchange-traded products and digital asset treasury companies may be competing with investors' interest in crypto.
Thorn indicated that the high-profile allocations of large investors, such as pension funds and hedge funds, to spot Bitcoin ETPs suggest that some institutions "may be seeking exposure to the sector through these large, liquid instruments rather than turning to early-stage venture investments."
Macroeconomic trends also continue to pose headwinds for allocators, but Thorn predicts that changes in the regulatory environment could drive renewed interest from allocators in the sector.
In this quarter, 47% of investment capital flowed to companies based in the U.S., compared to 28% in the UK and 3.8% in Singapore. The U.S. also accounted for 40% of completed deals, followed by Singapore at 7.3% and the UK at 6.8%.
Thorn stated that despite the previously unfriendly regulatory environment, the U.S. has historically accounted for the most deals and investment capital, and he expects this trend to continue under a crypto-friendly Trump administration.
Related: Coinbase "doubles down" on Solana through latest DEX acquisition
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