Bitcoin ETFs Impact Crypto Startups as Venture Capital Deals Drop by 20%

The rise of Bitcoin exchange-traded funds (ETFs) is having a significant impact on the crypto startup ecosystem, with venture capital (VC) investment in the sector seeing a sharp decline. In the third quarter of 2024, venture capital firms invested approximately $2.4 billion across 478 deals involving crypto and blockchain startups. According to a recent Galaxy Research report, both the total dollar value of investments and the number of deals dropped by 20% and 17% respectively.

Investors Shifting to Bitcoin ETFs

The report attributes this drop in VC funding to the increasing appeal of Bitcoin ETFs. Since their approval, these ETFs have attracted significant capital, suggesting that institutional investors may prefer large, liquid vehicles like ETFs over riskier, early-stage investments in startups. The shift in focus has diverted some funding that would have otherwise gone to emerging crypto projects.

Startups Still Drawing Interest

Despite the decline in overall VC activity, early-stage startups have remained the primary recipients of venture capital. These startups accounted for 85% of the total $2.4 billion in VC investments, while only 15% went to later-stage companies. The report also highlighted the unique position of crypto-native VC funds, which still have access to capital from previous raises and remain well-connected with entrepreneurs eager to launch new projects.

As the report noted, "Crypto-native funds may still have access to dry powder from large raises several years ago, and access to entrepreneurs means they can source new deals emerging from renewed enthusiasm in crypto."

AI Crypto Startups on the Rise, Web3 Projects Slump

The report also revealed that AI-focused crypto startups are gaining substantial traction, with quarter-over-quarter (QoQ) VC investment in this category surging by 5x. In contrast, the Web3, NFT, DAO, Metaverse, and Gaming sectors saw the sharpest decline in funding, with a 39% drop in QoQ investments. However, Web3 and gaming projects still accounted for 25% of all deals, totaling 120 transactions.

The "Trading/Exchange/Investing/Lending" category attracted the largest share of VC capital, with $462.3 million invested in this segment. Major recipients include Cryptospherex, which raised $200 million, and Figure Markets, which secured $73.3 million.

U.S. Leads Global Crypto VC Investments

Geographically, the United States remains the top destination for crypto venture capital, accounting for 43.5% of all deals. Singapore ranked second with 8.7%, followed by the United Kingdom at 6.8%, the United Arab Emirates (UAE) with 3.8%, and Switzerland rounding out the top five with 3%.

As the influence of Bitcoin ETFs continues to reshape investor behavior, the crypto startup landscape may face new challenges in securing funding, even as certain sectors like AI see renewed interest.