Bitcoin and Ethereum may rebound, but venture capital firms remain bearish on the crypto space, according to a new opinion Report Published by Galaxy Research.
Crypto and blockchain firms received $2.3 billion in investments from venture capital firms in the second quarter of this year. That represents a steep decline from the same period a year ago, when VC firms invested more than $8 billion.
The crypto industry has been flooded with venture capital amid its pandemic-era boom, taking in a record $13 billion in the first quarter of 2022. But a challenging business environment and high interest rates have effectively reduced the flood of deal flow to a small trickle—and it continues to shrink.
“Invested capital has yet to find a clear bottom,” the report said. “Rising rates continue to reduce allocator appetite for betting on long-tail risk assets such as venture funds.”
As a result, the total amount of venture capital invested in crypto firms has now declined for the fifth consecutive quarter, the report notes.
Venture capital firms play a critical role in expanding the digital assets space and investing in startups to finance their growth in exchange for equity or tokens.
While the amount of money thrown at crypto firms decreased overall, the number of deals rose from 439 to 456 in the first quarter, the report points out. Deals involving companies that make 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. Firms focused on Web3, NFTs, Gaming, DAOs and the metaverse received $442 million.
Cross-chain NFT marketplace Magic Eden was highlighted in its recent $52 million transaction report, which Galaxy Research said was the largest in the NFT space this quarter.
Despite the regulatory headwind, US crypto startups are receiving strong attention from venture capitalists, Galaxy Digital reported, indicating that the Securities and Exchange Commission’s recent regulatory blitz hasn’t completely deterred investors.
The report noted that 45% of the capital invested in crypto companies went to US-based firms, followed by the United Kingdom with 7.5% and Singapore with 5.7%.
The report added that the lack of VC activity is not unique to crypto, explaining that tight monetary conditions have weighed on the ability of VC firms to raise funds for investments across the board.
But the report acknowledges that other factors may be at play, given the crypto space’s last set of bankruptcies last year, “and many allocators feel burned out after the spectacular explosion of many venture-backed companies in 2022.”