In a recent report, a research firm has revealed that despite the increasing prices of crypto assets along with other metrics, certain aspects haven’t changed. While Bitcoin and Ethereum have been on a rise, venture capital firms continue to sour on the crypto space.
According to Galaxy Research, crypto firms have seen declining interest from the venture capital firms. The report stated that crypto and blockchain firms together saw $2.3 billion in investments from venture capital firms during the second quarter of this year.
Notably, the report represents a steep decline from the investments recorded during the same period a year ago, this isn’t much lower than that of the previous quarter. Last year, VC firms invested more than $8 billion whereas in the previous quarter the value was reported at $2.6 billion.
Reportedly, the crypto industry was blooming with venture capital during its pandemic-era boom, drawing a record $13 billion in the first quarter of 2022. However, sources suggest that a challenging business environment in the distressed times and higher interest rates have effectively reduced the deal flow flood to a small trickle and it continues to shrink. The report stated that:
Capital invested has not yet found a clear bottom. Rising rates continue to reduce allocator appetites to bet on long-tail risk assets like venture funds.
It is important to note that the declining trend isn’t new and has been continuing for a while. The firm reports that the sum of venture capital invested in crypto firms has now declined for the fifth quarter in a row.
Notably, 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 cash given to crypto firms has declined overall, the number of deals ticked has moved upwards. The report stated that the deals moved to 456 from 439 in the first quarter this year.
Amid this, specifically deals involving companies building privacy and security products grew over 275%. However, in the crypto space, startups focused on trading, exchanges, investing, and lending attracted the most capital around $473 million. Following this, came the entities centered on Web3, non-fungible tokens (NFTs), gaming, decentralised autonomous organisations (DAOs), and the metaverse, which received $442 million.
In particular, Magic Eden, the cross-chain NFT marketplace, received spotlight in the report for its recent $52 million deal. The report quoted it to be the largest in the NFT space for the quarter.
Interestingly despite regulatory crackdown, the repot stated that crypto startups in the U.S. continue to receive significant attention from venture capitalists. This suggests that the Securities and Exchange Commission’s (SEC) recent regulatory crackdown has not completely scared investors away.
As highlighted in the report, over 45% of capital invested in crypto companies was directed at U.S.-based firms. After that were the United Kingdom at 7.5% and Singapore at 5.7%. To the end, report concluded 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.
However, the report acknowledges that other factors could also be at play, including the bankruptcies that defined last the crypto space last year. The report stated:
Many allocators feel burned after the spectacular blowups of several venture-backed companies in 2022.
Notably, the decline in VC funding is not necessarily an indication that the industry is in trouble especially considering the increasing number of deals. As the blockchain and crypto space continues to mature, investors are likely to become more selective, looking for companies with solid business models and sustainable growth prospects.
With the increasing interest in non-volatile innovations, it is expected that more startups will emerge, looking to capitalize on the growing demand for blockchain-based solutions. Additionally, the number of deals display hopes and optimism in the face of increasing enforcement actions.