- Investments into crypto projects are surging.
- However, VCs and industry insiders see several reasons why it won’t hit bull market levels in 2024.
- And Joe Biden remaining in the White House is only one of them.
Venture capital investments into crypto projects will reach $12 billion in 2024 — only a 27% increase from the $9.4 billion raised last year even as Bitcoin soared to a new record.
That’s according to PitchBook’s crypto analyst Robert Le.
“The pace of investments will continue to grow, but not at a pace that we saw in 2020, 2021,” Le told DL News.
VC sentiment is often seen as an industry weather vane.
This sentiment is adding to the bearishness among industry insiders, who told DL News that their hopes are waning that Wall Street muscling into digital assets would trigger another bull run.
Sticky inflation, uncertain regulations, and the ghost of scandals past make for a pessimistic outlook.
Scandals
Crypto investments fell almost 70% from 2022 to $9.4 billion in 2023, according to PitchBook.
DefiLlama’s data backs up the picture.
“The last few years in venture capital have been really challenging,” Mike Giampapa, general partner at Galaxy Ventures, told DL News.
Scandals including the collapse of FTX and the Terra crash — and their resulting lawsuits and criminal charges — have curbed investors’ appetites, Le said.
Many major generalist investors who were burnt by their previous crypto investments have yet to return, which has kept the total down, Le said.
Inflation
VCs’ appetite is also influenced by the price of cryptocurrencies. If Bitcoin skyrockets, so does investor sentiment, Le said.
While crypto has rallied this year thanks to the launch of several spot Bitcoin exchange-traded funds by Wall Street giants like BlackRock, sticky inflation has kept that rally muted.
It’s basic economics. High inflation means retail investors have less money to spend on riskier assets like Bitcoin.
With the Federal Reserve keeping interest rates elevated for the time being, there are diminished chances of crypto price surges, which in turn means VC investment will remain muted.
On the flip side, if the US central bank cut interest rates, then crypto would likely surge, which could see VC investments increase 60% quarter over quarter — putting the year’s total at about $21 billion, Le said.
Big politics
Donald Trump and Joe Biden, who are both angling for a second term in the Oval Office, have planted themselves on polar opposites of the topic.
Trump is more pro, while Biden has adopted an anti-crypto stance akin to that held by Securities and Exchange Commission Chair Gary Gensler, who has cracked down hard on the industry during his tenure.
How the election plays out will also affect VC sentiment.
A Republican administration could be more favourable to the crypto ecosystem and mean that Gensler would leave office, though Gensler could leave no matter how the election goes, Giampapa said.
A more favourable SEC chair would lead to more crypto startups being able to scale and exit — for instance through public listings, which enable investors to cash out on their investments, he said.
Le noted that traditional exits fell from 81 in 2021 to 73 in 2023.
“This is not unique to crypto — it’s just the tech market in general,” he said.
That figure doesn’t cover alternative exits in the form of token launches, which enable VCs to cash in on their investments.
Hope
To be sure, there are glimmers of hope for VC investments, with several firms maintaining they are far from idle.
Also, Le’s latest report shows VC investments into the sector rose to $2.4 billion in the first quarter, a 40% increase over the last quarter of 2023.
“We invest across all market cycles and we hold a long term view of the space,” Shan Aggarwal, vice president, corporate and business development at Coinbase Ventures, told DL News, adding that “we were very active in H2 2023.”
Le noted that many firms have a lot of dry powder.
“They can’t sit on those funds and collect management fees forever.”
Moreover, several crypto-focused VCs are raising new funds to pour into the market.
For instance, Paradigm is in talks to raise a new $750 million fund, according to Bloomberg.
Le also noted that while most generalist investors have so far not returned to crypto, their crypto teams have spent the bear market learning more about the industry.
“When we are at a full blown bull market, they’re gonna come back,” he said.
Aggarwal echoed that sentiment: “2024 is shaping to be a very active year for crypto VC and we will need to balance speed and agility to keep pace with the market, while remaining disciplined in our investment and capital allocation heuristics.”
Eric Johansson is DL News’ News Editor. Got a tip? Email him at eric@dlnews.com.
This story has been updated to correct a typo in the previous copy that suggested that the VCs would pour 2.4% more into crypto in 2024 compared to 2023. The correct number is that it would pour 24% more in, according to Le’s estimates.