The relative tepid flow of venture capital funding into the crypto industry this year, despite the recent crypto market resurgence, presents a downside risk, according to JPMorgan analysts.

"Our various proxies for crypto VC flows look rather subdued YTD [year to date] relative to previous years," JPMorgan analysts, led by Nikolaos Panigirtzoglou, wrote in a report on Thursday. "We had previously argued that a recovery in crypto VC flows is a necessary condition for a sustained recovery in crypto markets, so in our minds, the subdued VC flows YTD pose a downside risk."

Venture capital funding in the crypto sector has picked up momentum so far this year, yet it continues to lag behind previous years. The Block Pro's Deals Dashboard shows that the crypto industry has attracted $3.2 billion in VC investment year-to-date, compared to over $4 billion in the first four months of last year.

However, more venture capital firms are raising or have raised new funds amid the crypto market rebound this year. Earlier this month, 1kx raised $75 million to back early-stage crypto startups. Paradigm is reportedly in talks to raise between $750 million and $850 million for a new fund. Galaxy Digital, Hack VC and Hivemind Capital are also reportedly raising $100 million, $100 million, and $50 million for their new funds, respectively. Crypto accelerator Alliance had the first close of its third fund in February, receiving $10 million each from Brevan Howard Digital and Galaxy Digital, and is looking to raise an additional $80 million by July.

While VC funding appears to be slowly reviving, crypto hedge funds are more active this year, and their assets under management have increased sharply over the past six months, estimated at around $20 billion, the JPMorgan analysts said.

Spot Ethereum ETF approval

The JPMorgan analysts reiterated in Thursday's report that there is no more than a 50% chance of spot Ethereum ETH -3.83% exchange-traded fund approval in May, but the U.S. Securities and Exchange Commission will eventually approve such funds.

"Following the SEC investigation of the Ethereum Foundation, the optimism for spot Ethereum ETF approval by May 23rd appears to be also fading in market pricing as seen by the discount to NAV [net asset value] for the Grayscale Ethereum trust, which widened from 8% to 22% over the past month," the analysts concluded.