VC funding for crypto projects in Q1: Are tokens and altcoins dragged down by VC investments?

The altcoin bull market of 2024 is lagging, as most assets lag behind Bitcoin (BTC)’s growth. The mix of old and new tokens was expected to dominate the market. One reason for the subdued market may be earlier VC (Venture Capital) funding, which pressured the price. 

VC funding resulted in the development of numerous projects lacking organic support, aiming to replicate established crypto communities. Retail buyers quickly noticed that those VC-backed tokens rarely achieved the 100X growth of fully diluted coins and tokens. Even Binance started to watch new assets more closely to prevent the listing of coins with a small free float. 

Altcoins are also left behind by DeFi and trading based on stablecoins. Earlier trades of altcoins against BTC are practically abandoned. 

VC funding picks up again in 2024

The VC funding trend reversed after Three Arrows Capital (3AC) failed, which was affected by the crash of the FTX exchange. 3AC secured funding for newly emerging blockchains, including Polkadot, Avalanche, and Solana.

Read: Top 10 Crypto Venture Capital Firms Beyond

Yet the inflows did not stop entirely but picked up again in 2024. This also coincided with creating a whole new crop of tokens that had to be absorbed by the market. The latest financing rounds feature some form of mixed funding, but some of the biggest projects may still be affected by their previous financing rounds.

Since VC funds can have a discounted entry point, they can achieve returns even without a full-on bull market. The crypto market has achieved a baseline of activity which can still support many projects. However, liquidity and activity are already strained after the inflow of multiple tokens with a claim to visibility and success.

In the past few months, 80% of new venture funding went to early-stage startups, with only 20% for late-stage rounds. Some of the funding comes from older projects with significant treasuries accrued during their ICO stage. 

The appreciation of BTC and ETH meant those startups sat on a lot of dry powder and could turn into VC investors. Even Vitalik Buterin is directly listed as a VC entity to support innovation in the Ethereum ecosystem. Some backers are crypto insiders aware of trading opportunities and price cycles.

The trend for early-stage funding is not limited to crypto startups. Global VC behavior reflects a similar approach, as $29.5B flowed into early-stage startups, especially those focused on AI projects.

Also read: Venture capital has a crypto obsession – See?

In Q1, crypto projects received $2.94B from various forms of funding, achieving 600 deals for that period. Even formerly organic meme tokens like Shiba Inu (SHIB) raised a $12M VC deal during that period. The inflow of VC funding also drew in giants like BlackRock, who poured their main interest into Bitcoin, but also asset tokenization.

Projects possibly weighed down by their VC funding

The 2021 bull market managed to lift all assets, producing several superstars. Some of those projects remain prominent, but their tokens are under pressure and have not repeated the success of 2021.

Among the top trending tokens, the 1inch DEX received funding from Binance Labs. Paradigm’s portfolio includes staple platforms like Cosmos, MakerDAO, Compound, and Magic Eden. 

AAVE, Orca DEX, Axie Infinity, and other Web3 games have also received significant funding from 3AC. Gaming tokens are especially affected, as most of the ecosystem has received funding from Animoca Brands. 

There is no way to gauge the selling strategy of early backers. The only indicator of the effect of VC shares is stagnant market prices. Gaming tokens are especially affected, as game development requires significant upfront costs. For retail buyers, this may mean gaming tokens can fall prey to value extraction, as the VC team wants to recoup its investment. 

Venture capital positively affected product building. The landscape in 2024 is different, with more products shipping and fewer vaporware coins and tokens with irrational price moves. 

Retail is also much more aware of a community around coins and tokens and of “dead projects” that have little chance of returning. 

Cryptopolitan reporting by Hristina Vasileva