Venture capital firms are showing decreased interest in the crypto space, as revealed by a new report from Galaxy Research. In the second quarter of this year, VC investments in crypto and blockchain firms totaled $2.3 billion, a significant drop from the $8 billion invested during the same period last year. The report attributes the decline to a challenging business environment, higher interest rates, and reduced appetite for long-tail risk assets.

While the overall investment amount decreased, the number of deals in the crypto space increased slightly to 456, compared to 439 in the first quarter. Specifically, investments in companies focused on privacy and security products saw a significant surge of 275%.

Within the crypto sector, startups involved in trading, exchanges, investing, and lending attracted the most capital, amounting to $473 million. Following closely behind were firms in the Web3, NFTs, gaming, DAOs, and metaverse categories, which received $442 million.

Magic Eden, a cross-chain NFT marketplace, was highlighted in the report for securing a $52 million deal, making it the largest NFT investment of the quarter.

Despite regulatory challenges, the report also mentioned that U.S.-based crypto startups continue to garner significant attention from venture capitalists. Around 45% of the capital invested in crypto companies went to U.S. firms, with the United Kingdom and Singapore receiving 7.5% and 5.7% respectively.

The report acknowledged that the decline in VC activity is not exclusive to the crypto industry, as tighter monetary conditions have impacted VC firms’ ability to raise funds for investments across various sectors. Additionally, the report noted that some investors may remain cautious due to the bankruptcies experienced by several venture-backed crypto companies in 2022.