Crypto Capital Ventures: Why Firms Are STILL Going Crazy for Blockchain

It would be an understatement to say that crypto has captured the attention of venture capital firms. 

Since the ICO boom of 2017, money has poured into crypto startups. As a result, countless projects have been able to finance their innovative pursuits.

But in such a high-risk investment environment, even the largest players sometimes find it hard to stay afloat.

Over the last few years in particular, VC funding in crypto has changed dramatically. 

Here’s what you need to know, as well as what we can expect to happen next in 2024.

Key Takeaways

• Since VC funds seek high-risk assets in the hopes of quick profits, the crypto industry has seen an influx of financing.
• The opportunity to invest in innovative technologies early, together with a large room for growth and passive income, are key reasons why VCs have not given up on blockchain startups and crypto. 
• Still, startups find it hard to attract VC investments due to a lacking regulatory framework, insufficient education among VCs, high competition for funding, and theft in the industry.
• The most promising trends for VC investments in 2024 include the DeFi sector, blockchain gaming, and AI.

How 2017 Ignited VC Interest in Crypto

Despite being a pretty new technology at the time, the amount that crypto projects raised during the ICO boom in 2017 and 2018 is astonishing.

According to Cointelegraph, these projects raised over $10 billion in 2017 and $11.4 billion USD the following year.

Surprisingly, startups gained most of this funding from standalone investors.

But wherever money flows, opportunists are sure to try and take advantage. 

Fraudsters, in 2017 especially, managed to fill their pockets during this boom. This was made especially common due to low entry thresholds and the lack of sufficient education and regulation.

According to Bloomberg, around 80% of ICO projects in 2017 turned out to be scams.

Yet the overall interest in the new technology didn’t die down. On the contrary, the blockchain industry has since managed to grab the attention of venture capitalists eager to support promising startups.

What Is Crypto Venture Capital Financing?

Venture capital (VC) funds are usually created by investors who are hungry for high profits with no desire to wait around. 

Unlike traditional investment funds, which pursue low-risk yet stable income, these investment pools are ready to deal with high-risk investment opportunities.

Crypto startups fall under this category, which makes them incredibly attractive to VC firms. 

What’s more, these startups rarely go public due to high entry thresholds and the numerous regulations that these fundraising methods are bound by. As a result, VC financing is equally attractive to the startups themselves.

The Structure of the Crypto VC Market

As the crypto landscape constantly changes, so too does the structure of the VC funds that sponsor this environment. 

Right now, some of TradFi’s classic players, such as Fidelity and BlackRock, have been cashing in on crypto as well. 

After all, large and old funds have sufficient resources to handle high-risk assets and still stay afloat regardless of the outcome.

But smaller VCs have struggled to hold the top positions long enough when the risk is so high.

Here’s how the VC landscape has played out over the last few years:

2021: VC firms reach new highs in crypto

In the wake of the new bull run, the blockchain industry attracted more VC investments than it ever had before.

According to research conducted by the financial platform Galaxy, Q4 signified the all-time high of VC investment in the whole sector. Crypto startups raised more than $10.5 billion USD.

Some notable crypto VC funds included Paradigm, Hivemind Capital Partners, 10T Holdings, and Pantera Capital.

In addition, the Houston Pension Fund joined the gold rush too, having purchased $25 million USD worth of BTC and ETH. 

2022: A bear market claims its victims

There is always a recession following a bull run. But if you were to assume that this recession cooled down investors’ appetites for crypto, think twice. 

According to the yearly report released by Messari in January 2023, the amount of VC funds flowing into the industry during that period has been parabolic.

However, some of the biggest crypto failures took place in 2022, and had a long-lasting effect on the investment landscape. Even some of the large players got decimated.

2023: As some firms crumble, others dive in

As mentioned above, not all of the top funds from previous years have survived the new crypto winter. Though not all of these failures happened for the same reason.

3AC, for instance, collapsed due to its excessive leverage on long positions and other crypto derivatives. Ikigai was shaken by the FTX collapse, having invested a large portion of its funds into this exchange.

In addition, there were other negative factors affecting the industry. These included the U.S. Federal Reserve’s whiplash-inducing monetary policy, which had been in place for a few years. 

While crypto fraud was significantly lower than in 2022, the crypto capital ventures market was simply not as hot in 2023. Especially with the ‘new big thing,’ AI, significantly diverting the attention of investors.

That being said, many funds also increased the strength of their positions in 2023. This includes firms like 1confirmation, Framework, Placeholder, Syncracy Capital, and more.

This shows that, despite the bearish season, interest in crypto projects is alive and well.

The Benefits of Crypto for VCs

While not every year has been smooth sailing, VCs have not lost their appetite for investing in crypto and blockchain.

Some key reasons why venture capitalists still invest millions in the crypto industry include:

1. Early investment opportunities. When a project succeeds, it means huge returns for the VCs that get in on the ground floor.
2. Innovative technology. Crypto’s underlying technology, blockchain, is seen as a disruptive technology with wide use cases across many industries.
3. Significant room for growth. Crypto is still in its early stages of adoption, with many people yet to even buy their first coin. This could indicate an opportunity for future growth and large profits.
4. Passive income. Many DeFi startups provide their investors with an independent source of passive income via mechanisms like staking and lending. As a result, many investors take advantage of an ROI that outcompetes TradFi savings accounts.
5. Decentralized nature of the supported products. True DeFi solutions cannot be controlled by a single entity. Therefore, there is no power capable of closing them or depriving VCs of their profits.

Crypto startups may also represent a promising option for VC funds that wish to diversify their portfolios with high-tech acquisitions. 

Of course, there is always a high risk of running into a scam or a project failing to fulfill its potential. But as the industry evolves, VC fund managers may benefit from better understanding the landscape and making better choices on where to entrust their funds.

The Challenges for Crypto Startups in the VC Industry

Despite all these advantages, the path of crypto startups trying to obtain VC funding for their projects is not strewn with roses. There are still many obstacles and challenges to address.

These include:

1. An underdeveloped regulatory framework. Regulatory uncertainty is, perhaps, one of the most critical obstacles that blockchain companies have to face.
2. Lack of understanding from VCs. Despite their focus on innovative technology, venture capitalists do not always possess enough specific knowledge to always capitalize on the best opportunities.
3. High competition for funding. At the time of writing, Crunchbase alone lists more than 2,600 crypto startups.
4. Lack of an established track record. Many of the crypto startups seek VC investments while their projects are still at an early stage. Therefore, they may lack a proven record of an established user base, let alone a viable product.
5. Security concerns. The crypto industry has been faced with many large hacking events and failures, resulting in huge monetary losses. This makes some VC investors cautious and unwilling to invest in the developing crypto landscape.

New Trends for VС Funding in 2024

In 2024, VC investors still show a high level of interest in crypto. Yet, the long-lasting crypto winter, together with new emerging technologies such as AI, was bound to have a negative influence on the state of the market.

With that said, new trends for investors to look out for include the following:

1. Further growth of DeFi

The DeFi sector has already proved its efficiency compared to many of the TradFi solutions. 

Decentralized lending and borrowing solutions open up possibilities for crypto traders and investors. At the same time, staking platforms and other blockchain-based means of making passive income can provide cryptocurrency holders with more lucrative returns than banks and other centralized financial institutions.

The amount of funds locked in DeFi significantly dropped in the middle of 2022, with the 3AC collapse and other large crypto failures that followed. But the upcoming new Bitcoin halving may help the industry’s revival as it attracts more investors.

1. AI as the new frontline of innovation

The new trend of artificial intelligence has made a splash in the tech community. Will crypto and blockchain startups find any use for AI in their products?

If they do, the combination of these technologies could be incredibly attractive to VC funds.

2. Blockchain gaming

The play-to-earn approach that made the internet explode in 2021 is still relevant. Blockchain-based projects occupy top positions, by the amount of funds stored on their balances. According to DappRadar, the top 5 blockchain games currently hold close to $4 billion USD on their balance sheets.

VC funds making huge investments in this sector, such as Bitkraft, further emphasize the perceived value of blockchain-based games for venture capitalists.

VC investors started getting serious about blockchain and crypto in 2018, and not even long-lasting crypto winters have been able to divorce them from these opportunities. 

As the landscape matures, following the money will tell us a lot about how big the ceiling on crypto capital ventures really is.