Already, 2022 has been a record year for venture capital funding in the crypto space, but a decline in the second half may foreshadow a prolonged slowdown, according to new research from investment firm Galaxy Digital.
There have been 415 crypto-focused venture funds launched so far this year with a collective $121 billion raised, but only $32 billion in venture capital has been deployed since the start of the year.
“Due to tumultuous crypto market conditions in May and June, funds are likely pushing their fall fundraising to Q4 to allow markets to recalibrate,” Galaxy researchers notes in their third quarter venture funding update, released Friday.
Fewer crypto venture funds have been launched this year than in 2021, according to a second quarter 2022 report. Last year, 999 venture funds focused on crypto launched, compared with 415 in 2022 as of June 30.
In the third quarter of 2022, venture capital investors put more than $5.5 billion into crypto startups, compared with $8 billion in the second quarter, according to Galaxy. The third quarter of 2022 saw an 80% drop in venture capital raised.
The second quarter of 2022 marked the beginning of the decline in venture interest in the crypto space, Galaxy’s venture funding Q2 report noted. The period saw less than half of the pre-seed deals closed during the first quarter, according to the report, and the trend has only continued over the last quarter.
Plenty of dry powder for crypto venture capitalists
Due to continued volatility in the space, capital deployment has been slow. BlockTower Capital, for instance, has put $20 million of its newly launched $150 million fund to use.
As of mid-October, crypto-focused New Form Capital has only allocated around 30% of its $75 million Fund 2, according to TechCrunch.
There is a lag for venture funds reporting net asset values, though, Galaxy noted, and bearish market conditions are having a greater impact on allocation decisions.
“In a more stable market, the lag does not impede the allocator’s ongoing investment, but in a highly volatile market, the lag can cause problems,” Galaxy wrote.
This has to do with allocator’s investments in liquid assets, like stocks and fixed-income products, that have dropped over the past six months, so they have to re-balance.
“Because their liquid portfolios have declined, but they haven’t yet received Q3 fund reporting from their venture investments, allocators currently do not have an accurate view of their portfolio balances, potentially making new investments in crypto VC problematic at the moment,” the report added.