Market Update: Q1 2024
Q1 is locked in with the highest quarterly candle that Bitcoin ever printed.
March closed 16.8% up, Q1 of 2024 closed 68.7% up, Bitcoin has had seven green monthly candles in a row, and asset managers are scooping up Bitcoin in record numbers.
Lifetime venture capital (VC) and private equity (PE) direct investment in crypto startups is now at ~$83B, excluding secondary and retail. About half of this money is less than 2.33 years old, flowing in since December 2021.
Q1 2024 saw the first quarterly increase in VC/PE investments in two years, growing ~$650M (+34%) over Q4 2023. The last four quarters VC/PE investments combined were ~$8.9B, down 74% from peak (Q3 2021 — Q2 2022), but more than 2012 — H1 2018 combined.
Other positive developments in Q1 include:
- 11 Bitcoin ETFs. In less than a month, these spot Bitcoin ETFs surpassed $10 billion in AUM. In Q1, they surpassed the $50 billion mark, with over $180 billion in cumulative volume.
- In addition to their spot Bitcoin ETF in January, BlackRock launched a fund on Ethereum. The BlockRock USD Institutional Digital Liquidity Fund is represented by the blockchain-based BUIDL token, and is fully backed by cash, US treasury bills, and repurchase agreements. It will provide yield paid out via the Ethereum blockchain every day to token holders.
- Larry Fink, CEO of BlackRock, pushed crypto talking points on CNBC. He is quoted on Squawk Box, telling CNBC’s Andrew Ross Sorkin: “I see value in having an Ethereum ETF. As I said, these are just stepping stones towards tokenization. And I really do believe this is where we’re gonna be going. We have the technology to tokenize today … the moment you buy or sell an instrument it’s known it’s on a general ledger that is all created together. You want to talk about issues around money laundering and all that, this eliminates all corruption by having a tokenized system.”
- Google integrates Ethereum Name Service (ENS) into search. As of March 2024, if you search an Ethereum address or ENS domain name (e.g., vitalik.eth) in Google, it will display the address particulars such as ETH balance and time of latest transaction across Etherscan and other block explorers.
- GoDaddy adds a “Crypto Wallet” tab and connects your DNS name to ENS. The integration allows any website domain owner on GoDaddy to use their domain name as a crypto wallet address. They can receive any ERC-20 token to the domain address in a simple user-friendly way like Zelle or Venmo.
- 7 Ether ETFs under consideration. As of Q3 2023, seven Ether ETF proposals were filed by VanEck, Fidelity, Ishares, Invesco & Galaxy, Grayscale, Hashdex, and ARK & 21 Shares. As of Q1 2024, we are quietly awaiting whether they will be approved by the US SEC in the next quarter, with VanEck first in line for a decision on May 23. That said, the Polymarket prediction market currently gives it ~19% chance of happening.
- London Stock Exchange (LSE) announces accepting Bitcoin and Ethereum ETN applications. The LSE announced that they will roll out a marketplace for bitcoin and ether exchange-traded notes (ETNs) on May 28. They are starting to accept applications for trading these crypto ETNs from April 8.
- The US SEC is generally losing in court against crypto. They have even been rebuked by the court for lying and “gross abuse of power.” Consequently, the US SEC is required to pay attorneys’ fees for the defendants.
- However, a new case has arisen between the US SEC and Coinbase. Coinbase lost most of its motion to dismiss the lawsuit, with a judge ruling that the SEC made a plausible argument that Coinbase is operating as an unregistered broker, exchange, and clearinghouse.
VC Perspectives
TechCrunch reporter Jacquelyn Melinek interviewed nine crypto VCs to weigh in on why Q1 2024 investments were so hot and how it compares to the previous bull market. Key takeaways:
Increased Crypto VC Activity
$2.52 billion was raised across the crypto and blockchain sectors in Q1, a 25% increase from Q4 2023’s $2.02 billion, according to PitchBook data. David Nage, portfolio manager at Arca, tracked 690 deals in Q1, marking a 30–40% increase from the lows in 2023. It’s reminiscent of “2021 feels,” indicating a return of aggressive deal making.
Factors Fueling Investments
The surge in investments follows legal victories for Ripple and Grayscale and positive developments in DeFi (and memecoins) on Solana. There’s an increased demand for Bitcoin following SEC spot bitcoin ETF approvals in the US. Crypto markets have shown general resilience despite past crises that seemed like they could have killed it (e.g., LUNA, BlockFi, FTX collapse).
Optimism and Institutional Interest
Bullish macroeconomic indicators include upcoming crypto ETF products (e.g., potential for an Ethereum ETF) and the Bitcoin halving. There have been notable signs of institutional movement like BlackRock’s tokenized money market fund launch on Ethereum.
Sector and Technology Focus
In general, crypto startup deal flow has picked up in specific sectors including DeFi, SocialFi, Bitcoin L2, crypto-AI integration, and zero-knowledge (ZK) technologies. We’ve also seen significant investments in social media and web3 gaming.
Valuations and Fundraising Dynamics
Competitive VC environment is leading to higher valuations and quicker fundraising rounds. Seed rounds are showing higher valuations, in the consumer sector it can still be under $10 million, but in crypto-AI sector, seed valuations can exceed $300 million. A founder-friendly market is spiking valuations, with VCs offering more favorable terms to secure deals.
Outlook for 2024
We can expect continued activity and optimism in early-stage funding, despite potential inconsistent funding at the growth stage due to various macroeconomic factors including the anemic IPO market, lack of fundamentals-based underwriting of growth-stage crypto companies, and a confirmed trial between the SEC and Coinbase.
That said, we can expect a bullish market influenced by election year trends where markets make positive gains during election years plus the macro environment may improve later this year, manifesting first in interest rate cuts.
There’s a general expectation of crypto VC activity surpassing 2023’s totals, with estimates ranging above the $10 billion mark, but uncertain if we will see the sort of mania at the heights of 2021–2022.
Sector & On-Chain Analysis
Solana
Solana deserves special mention as its price has made nearly a full U-shaped recovery from lows in October 2023, with massive MoM gains since Q4 2024. In terms of MC, it recently broke its ATH, and there isn’t any obvious reason to expect this trend to reverse any time soon.
With an FDV > $100 billion, and circulating MC at $80 billion, we could consider Solana a “major” at this point, especially when considering its superior UX among other blockchains. Fast speed and low cost, paired with user friendly dapps, make Solana the most accessible on-chain casino in the space (more on that next). In addition, it is home to some of the most innovative RWA and DePIN protocols coming out.
Memecoins
The explosion of memecoins in Q1 can be largely attributed to Solana’s excellent on-chain casino experience.
Memecoins were by far the most profitable crypto narrative in Q1, skyrocketing to +1313% in average price returns across its top tokens in a matter of weeks. WIF (dogwifhat) gained +2721% in price returns in Q1 after going viral and fueling the memecoin crazy to unprecedented heights.
Remarkably, investing in memecoins in Q1 was 4.6x more profitable than the next highest crypto narrative around RWAs and 33.3x more profitable than the L2 narrative, which has had the lowest returns so far this year.
Real World Assets (RWAs)
Maybe the biggest narrative violation of the year, RWAs (#2 price performance) outperformed AI (#3 price performance). RWAs delivered returns of 286%, while in early February, RWAs led as the most profitable crypto narrative, it was quickly surpassed by memecoins (and AI), but surpassed AI yet again in late March. Among major RWA tokens, Mantra (OM) and TokenFi (TOKEN) gained the most at 1075% and 420% quarterly gains, respectively.
AI
The AI narrative did still perform well, relatively speaking, being the only other category to post triple-digit returns at 222%. Q1 was marked by every large-cap AI token posting gains, with AIOZ Network (AIOZ) leading the growth with 480% gains and Fetch.ai (FET) close behind with 378% gains.
L2s & Scaling
While L2s and scaling started Q1 rather weakly as the least profitable crypto narrative, there’s still hope for established and newcomer Ethereum L2s. We may see a shift in narrative as Q2 starts off with a notable rise in optimistic rollup activity, especially on Base.
Also, zero-knowledge (ZK) rollups appear to be picking up some activity in Q1 as well, most notably on zkSync Era, though much of this activity is likely driven by airdrop farming rather than practical chain usage.
DeFi
Despite lagging behind the aforementioned sectors, DeFi displayed solid performance with a 98.9% return in Q1, reclaiming its dominance over DePIN toward the end of the quarter. The notable uptick in DeFi prices was primarily driven by the proposed fee switch on Uniswap, triggering renewed interest in DeFi “governance” tokens which speculatively hold more utility than governance if earning yield from fees. Ribbon Finance (FBN) stood out as the most profitable large-cap DeFi token, soaring 431% in Q1 after the project’s strategic shift to merge with Aevo. Other major DeFi players making solid returns included Jupiter (JUP) with a 126% increase, Maker (MKR) at 121%, and The Graph (GRT) at 111%. All this shows the resilience and broad appeal of DeFi since its debut back in Summer 2020.
Social
The most noteworthy development in consumer social is the rise of Farcaster in 2024. Daily users and activity exploded since January and appears to still be climbing.
This meteoric rise can be attributed to the launch of Frames on January 26, which significantly expanded Farcaster’s functionality and appeal. Frames allows users to interact with a variety of applications and links directly within the Farcaster feed — like minting NFTs, playing games, and making transactions — without needing to navigate away from the platform.
Stablecoins
Stablecoins are a key index for measuring the growth of the crypto industry, and after a significant downturn post-UST collapse, we’re finally observing a rebound since last quarter and continuing through Q1 2024 with a ~$3.8 billion increase in stablecoin supply, marking the first increase in supply since Q1 2022.
The left-axis above indicates aggregate stablecoin MC and the right axis charts net position change (% in blue) and Bitcoin price (in black).
The long decrease in stablecoin supply can be traced back to major events like the collapse of UST, USDC depegging, Paxos halting BUSD minting, and prevailing bearish market sentiment.
But the landscape is shifting positively, which can be attributed to an uptick in USDT on Tron and Ethereum, but more notably the arrival of a major institutional player — PayPal. In August 2023, around the time we see the shift toward positive stablecoin flow, PayPal introduced its own stablecoin, PYUSD, citing a “digital payments revolution.”
PYUSD is backed by USD bank deposits, US treasuries, and similar cash equivalents and is redeemable 1:1 for USD. Given PayPal’s massive global presence and user base, PYUSD could catalyze broad acceptance of crypto payments.
NFTs
Despite mainstream media declaring NFTs dead September 2023, the NFT market has shown signs of revival, albeit not reaching the sort of NFT mania we saw in late 2021 to early 2022.
It is possible that NFTs never recover to the heights of those times due to two key developments: (a) the rise of memecoins and (b) the oversupply of NFT projects. In short, memecoins may simply be better at fulfilling the speculative desires and risk-seeking compulsion of former NFT traders (more liquid, easier to trade, etc.) while the oversupply of NFT projects dilutes interest and diminishes demand for individual projects.
A notable exception is the outperformance of Bitcoin NFTs, suggesting a selective market recovery that reflects a broader cycle of tech innovation — that is, initial excitement leads to market leadership in the new subcategory, followed by a surge of imitators. The problem is that only a few of these imitators deliver on their promises, leading to an oversupply of low-quality projects again diluting demand.
Despite this, a few market leaders have remained resilient — Pudgy Penguins on Ethereum and Mad Lads on Solana. Their resilience makes holders of these NFTs attractive targets for new projects building communities through airdrops. We can expect the trend of targeting established NFT communities for airdrops to continue, potentially also for newer leading Bitcoin NFTs.
Hacks & Scams
A crypto market update without mention of hacks and scams would be incomplete. In Q1 2024, the crypto industry suffered $336.3 million in losses from hacks and scams, according to the latest research report by web3 bug bounty and security services platform Immunefi. DeFi remains the primary target for hackers, accounting for 100% of the exploits compared to 0% for centralized finance.
Two major incidents account for 43% of the total losses, with the largest being an $82 million hack of Orbit Bridge. And more recently, the $62.8 million exploit of Blast-based NFT game Munchables scored the second-largest attack. However, these funds were recovered within 24 hours after the hacker agreed to relinquish the private keys to the stolen funds. In total, $73.9 million (22%) of the stolen funds in Q1 were recovered from seven exploits.
On a positive note, total exploit volume decreased 23.1% from the same period last year. Also, the number of attacks dropped from 74 in Q1 2023 to 61 in Q1 this year.
Conclusion
Q1 2024 has unfolded as a milestone for the crypto industry, marked by Bitcoin’s rallying to all-time highs and a revival in VC enthusiasm, signaling a strong rebound to start the new year. With Bitcoin ETFs drawing in over $50 billion, venture investments surging, and significant institutional forays into cryptocurrencies, the industry’s foundations are looking robust. BlackRock’s Ethereum fund and mainstream integrations like Google’s block explorer support and increasing adoption of PayPal’s PYUSD showcase increasing acceptance toward crypto. Despite regulatory challenges and exploits, it’s clear to us that the developments this quarter have been overall net positive for our industry.
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Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice, or investment recommendations. This post reflects the current opinions of the authors and does not necessarily reflect the opinions of Inception Capital, its affiliates, or individuals associated with Inception Capital. The opinions reflected herein are subject to change without being updated.
