J.P. Morgan raised concerns over the subdued venture capital funding in the cryptocurrency sector this year, despite a strong rebound in crypto prices.
According to the bank’s analysts, the relatively tepid investment flow into the crypto industry could pose a downside risk to the sustainability of the current market boom.
The J.P. Morgan team highlighted that venture capital flows into the crypto industry appear quite restrained year-to-date when compared to previous years. "Our various proxies for crypto VC flows look rather subdued YTD [year to date] relative to previous years," stated the report released on Thursday.
The analysts added that a recovery in venture capital funding is critical for a sustained recovery in the crypto markets.
Recent data indicates that the crypto sector has attracted $3.2 billion in venture capital investment so far this year, which trails the over $4 billion recorded in the first four months of last year.
Despite this, there's a bit of good news: more venture capital firms are getting into the game, either raising or having recently raised fresh funds focused on the crypto market.
Moreover, major players such as Galaxy Digital, Hack VC, and Hivemind Capital are also in the process of raising decent funds for their new crypto-focused investment vehicles.
The crypto accelerator Alliance achieved the first close of its third fund in February, securing $10 million each from Brevan Howard Digital and Galaxy Digital, with plans to raise an additional $80 million by July.
While the pace of venture capital funding is picking up, crypto hedge funds have been particularly active this year. Their assets under management have seen a sharp increase over the past six months, now estimated at around $20 billion.
In the same report, J.P. Morgan analysts also touched on regulatory developments, noting that the likelihood of a spot Ethereum ETF being approved by May is no more than 50%. This follows the SEC's investigation of the Ethereum Foundation.
Market sentiment around the approval appears to be waning, as seen in the growing discount to NAV (Net Asset Value) for the Grayscale Ethereum Trust. This discount widened from 8% to 22% over the past month.