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Crypto startups secured over $90 billion in funding by February 2024, with over 230 deals and almost $1.3 billion in the year’s start. Venture capitalists mainly funded decentralized finance, infrastructure, blockchain gaming, NFT, and web3 projects.
However, only a tiny part of the funding was allocated to crypto financial services in 2024. It contrasts greatly with previous years, particularly in 2021’s bull market, when this sector accounted for a substantial portion of VC’s investments.
Despite this recent trend, I believe investors shouldn’t overlook the cryptocurrency financial services landscape. On the contrary, it is a market they should pay closer attention to, especially since it is positioned well to become one of the most attractive sectors for crypto VC investments in the coming years.
Why crypto financial services deserve so much more
The crypto financial services sector’s relative lag in funding this year can be attributed to several factors, drawing insights from the broader financial and technological landscape. Firstly, crypto financial services involve a lot of rules and regulations, which can be tricky to navigate. This area is closely watched by governments and agencies, making it a bit of a high-wire act compared to more free-wheeling sectors like blockchain gaming or NFTs. The uncertainty about what new rules might come into play can make investors nervous.
Then, there’s the allure of the new and shiny. Projects that let people trade digital art or play blockchain-based games are easy to get excited about. They are cool, they are in the headlines, and they promise a whole new world of digital ownership and fun. Compared to these, the financial services sector might seem a bit old-fashioned.
But here is the thing: crypto financial services play a crucial role in the digital asset industry. In fact, they are the backbone that supports everything else in the cryptocurrency world. Without them, it would be hard to buy, sell, or do anything with cryptocurrencies safely and securely. This sector is all about making sure people can use their coins without a hitch, offering essential services like paying with digital assets, keeping them safe, and even helping businesses use crypto.
Investing in this sector might not seem as glamorous as buying the next hot NFT, but it holds tremendous potential. As crypto becomes integrated into daily finance, its supporting services will be in higher demand. Despite its current funding state, it’s a long-term play.
Focus, don’t overlook it
Investors and VCs should monitor the crypto financial services sector for several good reasons. First, as I mentioned earlier, it is the backbone of the digital asset world, including critical solutions like exchanges, payment products, and cryptocurrency management. As the crypto market grows, these services become more important, offering investors a solid opportunity.
Second, the rules around cryptocurrencies are starting to become more apparent. This development is good news because it makes the crypto financial services sector less risky and more attractive to investors. Companies that know how to work with these rules could do really well.
Third, big players are becoming interested in crypto, and large institutions are starting to gain exposure to the asset class through exchange-traded funds. As institutional clients need this sector’s financial services, it could translate into more business and growth for companies in this space.
Finally, there’s a lot of room for new and innovative ideas in crypto financial services. Thus, investors have the chance to support companies that could disrupt traditional finance and grow big.
Returning to the spotlight
To attract more investment, the sector’s projects should show they play by the book. They should make it clear they follow all the rules and keep their customers’ assets safe. This makes investors more comfortable putting their money in.
Crypto financial service companies also need to clearly explain what they do, why it’s needed, and how it can grow to help investors see the potential for big returns. Simultaneously, having a rockstar team with expertise in both finance and technology can make a significant difference. For investors, it shows that the company can handle the complex crypto world.
Moreover, crypto financial service firms that can work well with traditional finance and tech companies might have a better chance at success. It showcases how serious they are and whether they can fit into the broader TradFi world.
Focusing on these areas could make the crypto financial services sector more appealing to investors, helping it grow and become an even more critical part of the financial industry.
A well-positioned sector for future crypto VC funding
Given the current trends and developments, it is likely that cryptocurrency financial services will attract more investments in the next two to three years.
One of the reasons I’m optimistic about the sector’s future is that more and more big companies want to get into crypto. They need safe and reliable services to help them do this, which could mean more business for digital asset financial companies.
Also, as the government clarifies the rules around crypto, people will be more comfortable investing in it. Thus, it could bring more money into cryptocurrency financial services.
Improved technology is enhancing crypto financial services, attracting investors seeking innovative opportunities. Companies now offer crypto-insurance, payments, and loans, which could drive even more investments. The growing use of crypto raises the need for supporting financial services, potentially leading to increased sector investments.
With big companies getting involved, clearer rules, better tech, more services, and growing crypto adoption, the digital asset industry’s financial services sector could become a hot spot for VC investments in the next couple of years.
