Galaxy Digital, a renowned blockchain investment firm, recently published a detailed report on the status of venture capital (VC) investments in the cryptocurrency sector. The report highlighted a substantial increase in investments during the first quarter, with close to $2.5 billion spread across 603 deals. This growth was significant compared to the previous quarter.

The report unveiled a 29% surge in the dollar value and an impressive 68% rise in the number of deals compared to the previous quarter. It was the first time in three quarters that both measures showed growth simultaneously. Despite the positive growth seen, Galaxy emphasized the need to observe future quarters to determine if this trend can be maintained.

Factors Affecting VC Investment in Cryptocurrency

Galaxy mentioned that the rise in invested capital was modest due to various factors that could potentially restrict VC investment in the cryptocurrency sector. These factors include a high-interest environment, the failures of cryptocurrency companies in 2022, and a shortage of later-stage companies capable of receiving significant investments.

Furthermore, the emergence of Bitcoin Exchange-Traded Funds (ETFs) might divert funding and attention away from startups. Nevertheless, Galaxy acknowledged that ETFs and startups cater to different investment preferences.

Three Primary Categories

Galaxy's study highlighted the three main categories in the crypto sector that attracted the most funding in the first quarter, although it acknowledged the breadth of these categories. Infrastructure companies, which include staking, platform tools, and sequencing services, secured 24% of the total funds raised. Web3 companies received 21% of the investment, while trading firms obtained 17%. These categories also dominated deal counts, with infrastructure firms making up 24% of deals, web3 companies 15%, and trading firms 12%.

DeFi companies displayed a distinct variation, raising 6% of capital but accounting for 10% of all deals. Galaxy also pointed out substantial investments in Bitcoin Layer-2 projects, primarily driven by Ordinals and related standards. However, the Layer 2 category only attracted 7% of capital and 6% of deals.

Prevailing Trend Led by Early-Stage Crypto Firms

The report from Galaxy outlined the significance of early-stage deals in the first quarter, with companies falling into this category securing 80% of the funding. The majority of investment activity centered around startups established in the past few years, particularly those founded between 2021 and 2023. This trend is attributed to the availability of substantial funding for early-stage companies from crypto-specific funds, while larger generalist VC firms have either departed from the crypto sector or decreased their involvement.