(Bloomberg) — Cryptocurrency venture capital funds are currently undergoing a significant identity challenge.
The recent decline in digital asset prices—paired with market consolidation—has brought to light the weaknesses of an industry that thrived on speculation but struggles to establish lasting, profitable enterprises.
Retail investors seem to be stepping back from digital art and meme coins as token prices have severely dropped, largely due to incidents like rug-pulling and a surge in day trading following last year’s market crash. Nowadays, cryptocurrency VCs are leaning more towards established startup strategies focused on product-market fit, monetization, and long-term user retention.
The pressure is definitely on as the overall market declines. Bitcoin took another hit last week, losing almost 50% of its all-time high from October before showing some recovery. Altcoins are faring much worse, with a measurement of smaller tokens down 70% year over year. Even with a crypto-friendly administration in Washington and lenient regulations, retail demand—once a pivotal driving force for token-based VC strategies—has significantly fallen.
Funds focused solely on crypto are now channeling their efforts into higher-performing areas, such as stablecoin infrastructure and on-chain prediction markets. Some are even branching out into adjacent industries like fintech and AI. However, the emergence of traditional firms means that expertise in crypto alone may not suffice anymore.
“The market is consolidating around what actually works,” remarked Santiago Roel Santos, the founder and CEO of crypto private equity firm Inversion. “Web3 as a category is pretty much uninvestable right now. People are moving away from NFTs, gaming, and many DeFi platforms that were popular before. Even venture capitalists with funds are pivoting into fintech, stablecoin initiatives, and prediction markets. Everything else seems to be struggling.”
Crypto-specific funds like Mechanism Capital and Tangent are shifting their focus to deep tech, investing in robotic startups like Apptronik and Figure, showing how far the spotlight has moved from cryptocurrencies themselves. Last week, notable investment firm Multicoin Capital revealed that co-founder Kyle Samani is stepping away to explore interests in AI, longevity, and robotics.
Despite this trend, fundraising in the sector isn’t deteriorating as badly as one might expect. Venture firms reportedly invested $18.9 billion into crypto startups in 2025, though this is lower than the speculative highs of previous years, according to Blockworks data. Interestingly, this figure excludes investments in failed digital asset vaults that drained both capital and momentum from the industry. Last year, nearly a third of total VC funding went to just four deals, including Binance and Polymarket, underscoring how concentrated capital has become.
By summer’s end, the retreat became more pronounced. Funds began pulling back from risky investments in non-fungible tokens, Web3 social platforms, and blockchain gaming—all speculative narratives that characterized previous cycles. Galaxy Digital highlighted this trend in its fourth-quarter report, noting a shift away from early-cycle narratives.
Mergers and acquisitions peaked in October, with 22 deals completed. As 2026 unfolds, signs of consolidation are becoming evident. Social media platform Farcaster announced plans to return capital to its investors, while Gemini’s NFT marketplace, Nifty Gateway, will also be shutting down. Another NFT platform, Rodeo, is similarly in the process of winding down its operations.
Revenue generation, user retention, and willingness to pay are now at the forefront, whereas these metrics often played a secondary role in earlier cycles. Some crypto-native VCs are branching into fintech and AI, as noted by Catrina Wang, general partner at Portal Ventures.
“That approach may work for some, but it raises an important question: ‘What’s the right to win outside the core?'” she commented. “We’ve seen many outsiders struggle in this space. The same could be true for companies expanding without a solid backing.”
At the same time, some crypto-native funds are finding themselves squeezed out of the few sectors still attracting investment, like prediction markets and stablecoins, as traditional fintech and generalist companies step in. This shift threatens the core value that crypto-native venture funds once held: early access to token trading and deep understanding of market mechanisms—from incentive design to protocol governance—that gave them an edge over traditional investors. However, as digital assets become increasingly linked with Wall Street, that advantage may be eroding.
“I wouldn’t be shocked if we witness more funds quietly shutting down or downsizing,” said Tom Schmidt, a general partner at Dragonfly venture fund. “We also face growing competition from traditional VCs for the most attractive opportunities in the Web 2.5 domain.”
The funding landscape for many crypto startups has shifted dramatically. Projects lacking a clear product or revenue path find it challenging to secure funds. The time when a captivating story alone could draw millions appears to be over. Numerous teams are now confronting an uncertain future, as token sales are no longer considered a dependable fundraising avenue.
“This is the grim reality of capital allocation,” Roel Santos shared. “It doesn’t imply that the overlooked categories aren’t viable; they simply lack funding since capital tends to oscillate between extreme optimism and extreme pessimism.”
Nevertheless, some investors highlight successes like the crypto exchange Hyperliquid and the memecoin platform Pump.fun, both of which merge high speculation with solid user engagement. These examples remind us that product-market fit and sustainable gains can still flourish within cryptocurrencies, particularly in speculative areas that themselves are considered the product.
Unlike prior cycles when founders and investors were still figuring out what’s effective, there’s significantly less patience for projects without a clear route to profitability today.
“In markets where venture capital is scarcer, it’s beneficial to generate revenue and to be ‘default alive,'” Schmidt observed. “For projects seeking venture financing, generating revenue and proving a willingness to pay serve as key indicators of product-market fit for VCs.”
