Venture capital investor sentiment towards cryptocurrencies has continued to improve this year, with predictions of a possible recovery in the coming months.
This is despite a continuing breakdown in the relationship between bitcoin prices in the second quarter of 2024 and investment capital into cryptocurrency startups, Galaxy Digital said in its latest analysis on Tuesday.
Galaxy on Monday compiled PitchBook data, which reviewed deals made over the past three months, and found that capital investments rose 28% quarter-over-quarter to $3.19 billion.
While total deal volume was down about 4% from the previous quarter, the average valuation of a startup before new funding jumped from $19 million to $37 million, near an all-time high.
Still, venture capital activity has struggled to keep up with the price rise of the world's largest cryptocurrency. During the last bull run in 2021-2022, capital invested in early- and late-stage startups reached $12 billion, when bitcoin's price was hovering around $60,000.
Since then, it has fallen to just $3.75 billion, remaining much lower than in previous years, the study found. Galaxy points to several crypto-specific factors and macroeconomic headwinds as the cause of the gap between price and invested capital.
These include the launch of Bitcoin exchange-traded funds in the U.S. and rising interest rates, which have increased the cost of borrowed capital for new projects. Emerging areas such as restaking, blockchain modularization, and Bitcoin Layer 2 have also contributed to this divergence.
Galaxy said that despite there being less capital invested than at bitcoin's previous peak, the crypto market's recovery since the second half of 2023 has increased competition and fuelled investor fears of missing out.
“The resurgence of highly liquid cryptocurrencies may have asset allocators preparing for a full-scale return,” Galaxy heads of firmwide research and research analysts Gabe Parker and Alex Thorne wrote on Tuesday.
This is good news for startups desperate for additional funding, the duo wrote, as it could lead to increased interest and venture capital activity in the second half of 2024. If that happens, this could make this the third-busiest year for investment capital and deal volume after 2021 and 2022.
Galaxy said the U.S. continues to lead in deal-making and capital among startups, but regulatory headwinds such as unclear laws and hostile regulators could force companies to relocate overseas.
“If the United States is to remain a center of technological and financial innovation in the long term, policymakers need to be mindful of how their actions, or inaction, will impact the cryptocurrency and blockchain ecosystem,” Thorne and Parker wrote.
