Authors: Alex Thorn and Gabe Parker, Galaxy Digital research analysts

Compiled by: Yangz, Techub News

Compared to the strong performance of Bitcoin and liquid encryption currencies in the first quarter, the market has cooled slightly in the second quarter, but still shows significant growth compared to the same period last year. The rebound trend of encryption currency venture capital in the first quarter seems to be continuing. The performance of industry founders and investors in the second quarter indicates that the financing environment is more active than in the previous quarters. However, as of July 1st, the data performance is slightly below the market sentiment.

The number of industry venture capital transactions in the second quarter decreased slightly compared to the first quarter, from 603 transactions to 577 transactions, while investment capital increased from $2.5 billion in the first quarter to $3.2 billion in the second quarter. The median transaction size increased slightly from $3 million to $3.2 million, but the median pre-money valuation increased from $19 million to $37 million, reaching close to the historical high. These data indicate that although there is insufficient available investment capital compared to the previous peak period, the recovery of the encryption currency market in the past few quarters has brought fierce competition to investors and triggered their fear of missing out.

Trading Volume and Investment Capital

In the second quarter of 2024, venture capital invested $3.194 billion in encryption currencies and blockchain companies (an increase of 28% compared to the previous period), involving 577 transactions (a decrease of 4% compared to the previous period).

Investment Capital and Bitcoin Price

The long-standing correlation between the price of Bitcoin and the capital invested in encryption startups has been broken. Since January 2023, Bitcoin has risen significantly, while venture capital activity has not kept pace. Although Bitcoin has risen sharply this year and capital investment has also risen, it is still far below the level when Bitcoin surpassed $60,000 in 2021-2022. The pressure from native catalysts of encryption, such as Bitcoin ETFs and emerging areas like re-staking, modularization, and Bitcoin L2, as well as bankruptcies and regulatory challenges faced by encryption startups, along with macroeconomic headwinds (Interest Rate), have led to this apparent divergence. Now, with the recovery of liquidity in encryption currencies, venture capitalists are preparing to return, and venture capital activity in the second half of this year will also increase.

Stage Division of Venture Capital

In the second quarter of 2024, 78% of the funds were allocated to companies in the early stage of financing, while 20% were allocated to companies in the later stage of financing. Despite the active early-stage venture capital funds focusing on encryption currencies and holding reserve funds from 2021 and 2022, large integrated venture capital firms seem to have exited the industry or significantly reduced their activities, making it more difficult for late-stage startups to raise funds.

In terms of transaction volume, the share of Pre-Seed round transactions has slightly decreased but is still higher than the previous market cycle.

Valuation and Trading Volume

In 2023, the valuation of encryption companies supported by venture capital has dropped significantly, reaching the lowest median pre-investment valuation since the fourth quarter of 2020. However, in the first quarter of 2024, the valuation of encryption companies supported by venture capital began to rebound, soaring to $37 million in the second quarter (a 94% increase compared to the previous quarter), reaching the highest level since the fourth quarter of 2021. It should be noted that the significant fluctuations in the above data are due to the appearance of more long data, the lag in reporting, and the lack of publicly available valuation data. We strive to provide this information promptly after the end of each quarter, so the data may be revised, but this peak is still a signal. In addition, the median trading volume has slightly risen by 7% compared to the previous quarter, reaching $3.2 million, which is basically consistent with the past five quarters. The rise in valuation is due to the improvement in market sentiment; although investment capital has not increased significantly, founders have captured the interest and competition of the existing investor community.

Investment Category

In the second quarter of 2024, companies and projects in the 'Web3 / Non-fungible Token / DAO / Metaverse / Gaming' category raised a total of $758 million in encryption venture capital, accounting for the largest proportion (24%) among all categories. The two largest transactions in this category were Farcaster and Zentry, which raised $150 million and $140 million respectively.

Following closely are companies/projects related to infrastructure, transactions, and L1, accounting for 15%, 12%, and 12% of the investment respectively. It is worth noting that due to Monad and Berachain raising 225 million and 100 million US dollars respectively, the market share of L1 investment capital has grown sixfold. In addition, Bitcoin L2 raised 94.6 million US dollars in Q2 2024, a 174% increase from the previous quarter's 34.7 million US dollars.

Classification of Transaction Quantities

In terms of transaction volume, the 'Web3 / Non-fungible Token / DAO / Metaverse / Gaming' category is leading with a proportion of 19%, mainly due to the increase in Decentralization social media and gaming-related transactions. Although the number of financing rounds for encryption startups related to re-staking decreased in the second quarter of 2024, the infrastructure category ranked second in terms of transaction volume this quarter, accounting for 15%.

Following closely behind are encryption currency companies/projects related to trading and Decentralized Finance, accounting for 11% and 9% of the total transaction volume in the second quarter of 2024, respectively.

Stages and Categories of Venture Capital

By segmenting investment capital and transaction volume by stage and category, it is possible to gain a clearer understanding of which types of companies are raising funds in each category. In the second quarter of 2024, a significant amount of funds in the Web3, L1, and infrastructure categories were invested in early-stage companies and projects, while venture capital in the transaction category was more focused on companies in the later stages of financing.

By studying the capital shares invested at each stage in various categories, one can gain a deep understanding of the maturity of various investable capitals.

In addition, the trading volume also illustrates a similar situation. A considerable proportion of completed transactions in almost all categories involve early companies and projects.

By studying the transaction shares completed in each stage of each category, you can gain in-depth understanding of each stage of each investable category.

Investment by Geographical Location

In terms of investment amount, in the second quarter of 2024, over 40% of venture capital went to US-based companies. The UK accounted for 10%, Singapore accounted for 8.7%, the UAE accounted for 3.13%, and Hong Kong accounted for 2.78%.

In terms of investment amount, companies headquartered in the United States attracted 53% of venture capital, a month-on-month increase of 23.5%. The UK accounted for 12.78%, Singapore accounted for 4.6%, and the UAE accounted for 4.39%.

Investment Group Division

The majority of venture capital investments in the second quarter of 2024 were made in companies established between 2021 and 2023.

Summary

The risk appetite for encryption continues to improve, but it is still significantly lower than the Bull Market in 2021-2022. With Bitcoin and Ethereum rising by about 50% this year, investment capital has grown by 28% on a month-on-month basis, while trading volume has remained stable. If this growth rate continues until the end of the year, investment capital and trading volume in 2024 will be second only to 2021 and 2022, ranking third.

Investments in the Web3 and L1 categories are attracting attention. With Farcaster (US$1.5 billion) and Zentry (US$1.4 billion) driving the Web3 category, it is leading by a wide margin with a total financing of about US$7.5 billion. Meanwhile, driven by Monad (US$2.25 billion) and Berachain (US$1 billion) transactions, L1 ranks fourth with a performance of US$3.71 billion.

The median valuation of encryption currency enterprises that have received venture capital has surged significantly, reaching the highest level since the peak of the previous Bull Market in the fourth quarter of 2021. Affected by the bear market in 2022 and adverse macroeconomic factors, a large number of mainstream venture capital institutions are still in a wait-and-see state, while venture capital institutions focusing on encryption currency are in an increasingly competitive environment, providing project founders with more bargaining chips. It is important to note that this median is based on available data as of July 1st, and as trading information for the second quarter increases, the median may be updated and could potentially be adjusted downwards.

Bitcoin L2 continues to receive a large amount of investment, with related companies and projects raising a total of $94.6 million, an increase of 174% compared to the previous period. Investors' enthusiasm for the Bitcoin ecosystem to have more long-term composable block space and attract the return of models such as Decentralized Finance and Non-fungible Tokens remains high. Our internal research shows that at least 65 projects claim to be 'Bitcoin L2'.

Early-stage transactions have been dominant in the second quarter, accounting for nearly 80% of investment capital, with Pre-Seed round transactions representing 13% of all transactions. The sustained focus on early-stage transactions indicates the long-term healthy development of a more extensive encryption currency ecosystem. While some companies in later stages are facing difficulties in financing, entrepreneurs are seeking investors willing to invest in new innovative ideas.

The United States continues to lead the encryption currency entrepreneurial ecosystem. Although the United States maintains a clear advantage in trading and capital, unfavorable regulatory factors may force more long companies to move to other countries and regions. If the United States wants to maintain its position as a center for technological and financial innovation in the long term, policymakers need to be aware of how their actions or inactions will affect the encryption currency and blockchain ecosystem.