Author: Kit Source: RootData Translation: Shan Ouba, Golden Finance

The data in this article is derived from the RootData financing database and public market information, combined with institutional investment trends, to attempt to restore the true face of the crypto financing market in the first quarter of 2025.

With the advancement of artificial intelligence technology, cryptocurrency compliance is showing signs of fatigue

Since the ICO boom in 2017, the cryptocurrency market is undergoing its second important four-year technology cycle transformation. At the same time, the artificial intelligence industry has also entered its tenth development cycle, and breakthroughs from GPT-3 to large language models (LLMs) have also provided it with momentum. Following the technological iteration of Moore's Law, the crypto industry will face cyclical challenges in 2025 - the total financing amount plummeted from the peak of US$31 billion in 2021 to US$9.8 billion in 2024, a drop of 68%. In contrast, the financing amount of artificial intelligence exceeded US$110 billion in 2024, forming a clear capital siphoning effect.

The root of this structural change lies in the differentiation of the technology maturity curve. Since the midsummer of DeFi in 2020, the crypto field has lacked a breakthrough technology narrative, while artificial intelligence has continued to release productivity dividends through the evolution of the Transformer architecture. The widening funding gap in the two major fields essentially reflects the confidence of capital in the potential for technology application - most crypto projects follow the traditional "token issuance-exchange listing" path, while artificial intelligence has completed the commercial closed loop in fields such as medical care, manufacturing and education.

The AI ​​monsoon for cryptocurrency has not yet arrived — believers still have work to do

Data from the first quarter of 2025 shows that while the crypto community remains obsessed with the myth of AI memes — people enthusiastically imitated ELIZA, the first chatbot in AI history, hoping to build a decentralized version for the blockchain era — institutional investment in the crypto space is becoming increasingly polarized. Funding for centralized exchanges (CEX) and custody-related projects has shrunk significantly, from a peak share of 90% during the DeFi summer and post-FTX era to just 45%. At the same time, investment in AI, DeFi, and infrastructure projects has bucked the trend and accounted for 58% of total funding this quarter.

Meanwhile, funding for AI-related crypto projects has fluctuated wildly. Despite surging to $2.3 billion in the third quarter of 2024, it plummeted to $780 million by the first quarter of 2025, a 66% drop. This reflects the inherent contradiction of the "AI + blockchain" narrative: most current projects are still at the stage of superficial integration and fail to solve core problems such as model training and data ownership verification. In contrast, traditional AI venture capital has entered its own four-year technology cycle after GPT-3, with total annual investment growing from an average of $400 billion in 2017-2020 to more than $800 billion per year. In contrast, incremental funding for AI-related crypto projects has accounted for less than 1% of this increase.

This raises an important question: How can blockchain meaningfully merge with AI so that crypto founders and believers can benefit from the capital pouring into AI? The current pace of AI-crypto funding suggests that native crypto capital is willing to double down in search of the next “golden goose” at this intersection. Ultimately, crypto project founders should think deeply about how to combine AI with infrastructure layer solutions to solve core problems of verification and trust—challenges that centralized finance and traditional AI still struggle to address.

The Double Dilemma of Liquidity

The decoupling of monetary policy tightening and on-chain stablecoin issuance has further distorted the cryptocurrency market. In March 2025, USDC on-chain circulation hit an all-time high of $98 billion, but cryptocurrency venture capital absorbed only $4.6 billion during the same period. This “liquidity dam” phenomenon reveals a deeper contradiction: institutional capital is increasingly being directed to compliant investment vehicles such as BTC spot ETFs, rather than supporting early-stage innovation.

In fact, primary market cryptocurrency financing has fallen sharply - from a peak of $31 billion in 2021 to just $9.8 billion in 2024, a drop of 68%. At the same time, the number of transactions has also dropped from 1,880 in 2021 and 2022 to 1,544 in 2024. The average transaction size has shrunk from $15.7 million in 2022 to $6.4 million in 2024, a drop of 59%. The liquidity that once poured into early cryptocurrency startups - thanks to breakthroughs in programmable blockchains and quantitative easing in the post-epidemic era of 2020 - has now almost dried up.

Financing Dilemma: Founders’ Melee

RootData data shows that the later the financing stage, the more obvious the shrinkage of transaction size. In the bull market cycle of 2021, overvaluation set unrealistic benchmarks, and now founders find that their valuations are stretched as early as the seed round or Series A financing stage. From the third quarter of 2023 to the fourth quarter of 2024, no institutional investors publicly participated in Series C financing. While strategic rounds have remained relatively stable, M&A and OTC deals have rebounded, suggesting that in an environment of scarce liquidity, institutions prefer to strike deals privately rather than publicly hold shares.

One ​​notable trend is that the median deal size for all rounds has steadily increased. This suggests that in the face of a decline in total investment, capital has chosen to invest less frequently but in larger amounts—favoring founders with stronger fundamentals and more abundant cash flow. For founders, it's a free-for-all: those with deep reserves and ample funds attract the most attention.

With the explosive growth of both artificial intelligence and encryption technology, the competition among early cryptocurrency founders for investors' limited gold coins has reached a fever pitch. Since 2017, only 281 of the 2,681 projects that received seed round financing have entered the A round (a conversion rate of only 10.5%), and less than 30 have entered the C round. This "one in ten" survival game reflects deep-seated systemic problems within early cryptocurrency startups.

From valuation bubble to value adjustment:

In the 2021 cycle, the median seed round financing was as high as US$4.7 million. By the first quarter of 2025, this figure had plummeted to only US$400,000. In addition to the shrinking total financing amount, the decline in the proportion of seed round transactions also shows that investors' interest in early-stage cryptocurrency companies is waning.

In contrast, pre-seed rounds have seen a notable shift, with average deal size increasing from $2 million to $2.91 million in Q1 2025. Both total and average funding amounts have increased during this riskier phase, suggesting that crypto venture capitalists favor cheaper entry points despite higher uncertainty.

Although total Series A funding has shrunk, median investment has risen from $10 million to $14.5 million, reflecting capital flows to quality projects. Projects that have achieved product-market fit (PMF) and are cash-flow positive are receiving huge investments, while those that fail to achieve profitability are being eliminated at the seed stage.

Breakdown of Token Economics:

Series B projects are facing increasing pressure from token unlocking plans. Without new liquidity injections, the market will not be able to absorb the selling pressure, leading to a negative feedback loop. According to RootData, most projects face multi-million dollar sell-offs every time their tokens are unlocked, which has led to soured market sentiment and eroded investor confidence.

Technology gap emerges:

The 2021 financing bubble has left a long list of failed projects - especially in previously hyped areas such as cross-chain bridges and NFT platforms. These projects have failed to adapt to new technological trends such as ZK-Rollups, modular blockchains, and AI integration. As a result, many limited partners have failed to achieve significant returns from their fund structures and are currently seeking radical survival measures. Institutional activity in the form of over-the-counter transactions and mergers and acquisitions is rapidly climbing as funds try to salvage value in a changing industry landscape.

Funding crisis: a cliff-like decline

According to RootData, the total financing of crypto investment companies plummeted from a peak of US$22 billion in 2022 to only US$2 billion in 2024, a drop of 91%. This rate of shrinkage far exceeds the 35% drop in financing for Nasdaq-listed technology companies during the same period. This sharp decline was caused by a combination of macro liquidity constraints, diminishing returns on token issuance, and falling institutional internal rates of return, which have severely weakened LP and independent investor interest in crypto venture capital. This also shows that the crypto industry's AI innovation in this cycle has largely failed to attract a large amount of external capital.

Quarterly data confirms this downward trend: after the second quarter of 2024 (after the Bitcoin halving), financing fell to $420 million, the highest level since before the DeFi era in 2020. Despite the bull run, this cycle has not brought new capital to crypto investment companies.

Even leading companies have suffered setbacks: a16z suffered a setback after three consecutive successful financings from 2020 to 2022, while Paradigm's 2024 fund has shrunk by 72% compared to its peak in 2021.

As the public offering market cools, private placement and OTC trading volumes surged 35%. In the fourth quarter of 2024 and the first quarter of 2025, total financing through OTC transactions reached US$1.9 billion, of which M&A and OTC transactions accounted for 75%. The increase in "private" transactions reflects the growing concerns of institutional investors about liquidity. Investors are using customized token unlocking plans and repurchase agreements to minimize the impact of market fluctuations on their portfolios.

The crisis of price plummeting after listing

There is a popular saying in the crypto community today - "short selling as soon as it goes online" - reflecting the growing suspicion and resistance of retail investors to institutionally backed token projects. RootData’s analysis of tokens listed on Binance and their final private round valuations reveals the huge exit pressure currently faced by institutions under the commonly used “3+1” unlocking model:

a. Institutions must achieve a 5-10x return on the first unlocked portion to break even on their total investment.

b. Since the launch of Arbitrum in 2021, few late-stage supported projects have allowed investors to recover their costs without hedging strategies.

c. In 2024, more than half of the newly issued tokens will have a fully diluted valuation (FDV) of less than 5 times their last round valuation, triggering a dangerous chain reaction:

• Institutions face unrealized losses of about 50% in the initial 10% of token unlocking.

• The subsequent lifting of the ban triggered sustained selling pressure, further dragging down prices.

This situation also explains the surge in OTC and private placement transactions mentioned earlier - the decline in returns on token portfolios forced institutional investors to seek other exit strategies. In short, if even tokens listed on Binance suffer the same fate, then institutional investors will face an even harsher reality for tokens issued on secondary exchanges with less liquidity.

Cryptocurrency investment is becoming more rational

Based on RootData's analysis of the time between seed and Series A financing and the difference in timelines, we can observe a clear change in the maturity of the cryptocurrency financing landscape.

From 2017 to 2020, the average time from project financing to the next round increased steadily and peaked at 1,087.75 days in the fourth quarter of 2018. This reflects the slower pace of early financing in the industry and lower liquidity. During this period, the average time from project financing to the next round also varied widely, with a peak of 578.63 days in the fourth quarter of 2017, indicating that there is great uncertainty in the timing of financing. In the ICO and early DeFi waves from 2017 to 2019, the quality of projects varied greatly, and many projects experienced a long financing cycle due to the immaturity of the token economic model. However, after 2021, the average time to the next round of financing dropped sharply - 317.7 days in the first quarter of 2023 and further dropped to 133 days in the third quarter of 2024. This shows that the market is more efficient, and strong projects are able to raise subsequent funds faster as investor confidence and capital allocation become more concentrated. At the same time, the difference in financing timelines has steadily declined since 2021, indicating that the market has entered a more rational stage. The financing cycles of various projects have become more predictable and consistent. Institutional investors now clearly tend to support top teams, and funds are increasingly concentrated in early financing stages such as seed and Series A. This allows high-quality projects to expand faster, while those that lack innovation or lack a clear path to profitability are quickly eliminated - which accelerates the natural selection process within the industry.

Conclusion

The cryptocurrency industry is undergoing a transformation - from early chaos to rational development. Since 2021, the average time to the next round of financing and its variance have shown a continuous downward trend. This not only reflects the improvement in capital allocation efficiency, but also reflects the growing preference of investors for high-quality projects. In the next few years, projects that can quickly adapt to market demand, integrate emerging technologies such as artificial intelligence, and have commercial viability will become the first choice of institutional capital.

In short, the market now pays more attention to profitability and product-market fit (PMF). Founders must verify their business model as early as possible - preferably in the seed stage - to accelerate subsequent financing. At the same time, institutional investors should focus on high-potential teams that can obtain multiple rounds of financing in a short period of time. These teams typically demonstrate clear growth trajectories and strong execution.

In the author's view, the widely held view that liquidity crunch is the main reason for crypto's underperformance is misleading. In fact, 2024 marks the beginning of a new compliance era for cryptocurrencies - a turning point for more mature institutions to enter the field. The real problem is that cryptocurrency founders have yet to provide a convincing and commercially viable integration of AI and blockchain technology. This failure to close the loop may be a key reason why the cryptocurrency industry has difficulty reaping liquidity spillovers from the AI ​​boom.