A report by Galaxy Research has revealed that venture capital investments in the crypto sector have decreased by more than 50 percent in a year despite the recent rally of Bitcoin and Ethereum.
Crypto companies saw a $2.3 billion VC investment in the second quarter of this year, a significant drop from last year when VC firms invested over $8 billion.
The industry attracted $13 billion in venture capital in the first quarter of 2022. However, the capital flow has diminished due to a challenging business environment and rising interest rates.
“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.”
Additionally, data show that VC investment in crypto firms has declined for the fifth consecutive quarter. Venture capitalists are important in supporting the growth of the digital assets industry by investing in startups and offering funding in exchange for equity or tokens.
Despite a decline in total investment capital, the number of deals in the first quarter grew from 439 to 456. Notably, investments in companies specializing in privacy and security products experienced a rise of 275 percent.
Trading, investing and lending startups in crypto accumulated $473 million in capital. Meanwhile, firms focused on Web3, NFTs, gaming, DAOs and the metaverse received $442 million.
Although several crypto startups in the U.S. face regulatory challenges, Galaxy Digital’s report highlights that some still attract venture capitalists’ interest.
The report also found that 45 percent of crypto investment capital went to U.S. firms, with U.K. firms receiving 7.5 percent and Singaporean companies getting 5.7 percent.
A recent court ruling had positive and negative implications for the SEC’s crypto market regulation. The judge concluded that the sales of Ripple’s XRP on exchanges and through algorithms were not investment contracts. However, Ripple’s institutional XRP sales violated securities laws.
Nevertheless, the ruling caused a rise in the combined crypto market, leading to price increases in Bitcoin, Ethereum and XRP. The XRP price, in particular, rose to about 60 percent within 24 hours as traders hoped the ruling marked the end of regulatory uncertainty in the crypto market.
This year, there has been ongoing pressure on U.S. lawmakers and regulators to develop rules for operating Bitcoin and crypto firms. This pressure has grown as countries in Europe and Asia have taken the lead in applying their regulations.
BlackRock CEO Larry Fink said that cryptocurrencies, including Bitcoin, have the potential to surpass traditional currencies like the U.S. dollar.
“Importantly, because it’s so international, [crypto is] going to transcend any one currency in currency valuation,” Fink told CNBC.
Fink, who previously disregarded Bitcoin as a mere “index of money laundering,” noted an increased interest in crypto investment, leading BlackRock to apply for a U.S. Bitcoin ETF.
He said BlackRock aims to democratize investing through ETFs, leveraging its past success in transforming the investment landscape.
“We are working with our regulators because, as in any new market, if BlackRock’s name is going to be on it, we’re going to make sure that it’s safe and sound and protected,” Fink said.
Fidelity and other Wall Street firms followed BlackRock’s lead in pursuing ETFs, showing confidence in the ability of the largest asset manager to overcome regulatory problems for a U.S. spot bitcoin ETF.
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