Bitcoin and Ethereum may be rising again, but venture capital firms continued to sour on the crypto space, according to a new report released by Galaxy Research.
Crypto and blockchain firms saw $2.3 billion in investments from venture capital firms during the second quarter of this year. It represents a steep decline from the same period a year ago, when VC firms invested more than $8 billion.
The crypto industry was flush with venture capital during its pandemic-era boom, drawing a record $13 billion in the first quarter of 2022. But a challenging business environment and higher interest rates have effectively reduced the deal flow flood to a small trickle—and it continues to shrink.
“Capital invested has not yet found a clear bottom,” the report said. “Rising rates continue to reduce allocator appetites to bet on long-tail risk assets like venture funds.”
As a result, the report notes, the sum of venture capital invested in crypto firms has now declined for the fifth quarter in a row.
Venture capital firms play a vital role in fueling the digital assets space, investing in startups and funding their growth in exchange for equity or tokens.
While the amount of cash thrown at crypto firms declined overall, the number of deals ticked upward to 456 from 439 in the first quarter, the report noted. Deals specifically involving companies building privacy and security products grew 275%.
Within the crypto space, startups focused on trading, exchanges, investing, and lending attracted the most capital at $473 million. That was followed by firms centered on Web3, NFTs, Gaming, DAOs, and the metaverse, which received $442 million.
Magic Eden, the cross-chain NFT marketplace, was highlighted in the report for its recent $52 million deal, which Galaxy Research said was the largest in the NFT space for the quarter.
Despite regulatory headwinds, Galaxy Digital also reported that crypto startups in the U.S. continue to receive robust attention from venture capitalists, suggesting that the Securities and Exchange Commission’s recent regulatory blitz has not entirely dissuaded investors.
The report noted that 45% of capital invested in crypto companies was directed at U.S.-based firms, followed by the United Kingdom at 7.5% and Singapore at 5.7%.
The report added that the lack of VC activity isn’t necessarily unique to crypto, explaining that tighter monetary conditions have weighed on VC firms’ ability to raise funds for investments across the board.
But the report acknowledges that other factors could also be at play, considering the bankruptcies that defined last the crypto space last year, stating “many allocators feel burned after the spectacular blowups of several venture-backed companies in 2022.”