In the third quarter of 2023, venture capital funding in the cryptocurrency sector experienced a notable decline of 20%, amounting to $2.4 billion. This trend is attributed to a “barbell market” scenario, where investments are heavily polarized between Bitcoin and high-risk memecoins, leading to a lack of enthusiasm for mid-tier projects that typically seek funding. According to a recent report, the overall number of deals also decreased by 17%, with 478 transactions completed during this period.
Despite the decline in funding when compared to prior quarters, this figure still represents a 21.5% increase from the roughly $2 billion invested in the same quarter of the previous year. The report underscores that venture capital stagnation is influenced by several factors, notably the major focus on Bitcoin and emerging exchange-traded funds (ETFs) while speculative assets like memecoins remain unpredictable and receive minimal financial backing.
Additionally, larger institutional investors are now directing their capital towards Bitcoin ETFs, which has detracted from early-stage venture capital investments in the crypto realm. The historical correlation between Bitcoin ’s market performance and crypto venture funding seems to have deteriorated, indicating a shift in investor sentiment. The current landscape has fostered a lack of interest in cryptocurrency venture funding, which, combined with narratives that predominantly favor Bitcoin , has sidelined numerous other emerging technologies.
Early-stage investment captured the largest share of capital, with crypto exchanges and firms developing layer 1 blockchains leading the way. Notably, ventures that integrate artificial intelligence have shown remarkable growth, with a fivefold increase in funding compared to the previous quarter. U.S.-based firms secured 56% of the VC funding, while Singapore and the U.K. followed as notable contributors.
Looking ahead, there is potential for venture capital funding to pick up pace in the fourth quarter of 2023 and into early 2025. This anticipated recovery may be driven by decreasing interest rates and a potentially more favorable regulatory environment for crypto investments.
