Europe’s VCs pumped a record $2.2 billion into cryptocurrency and DeFi startups in 2021. Here’s what finally triggered the boom.

• Europe’s VCs invested a record $2.2 billion in crypto and DeFi startups in 2021, per Dealroom data.
• The region’s startup ecosystem has benefited from the mainstream adoption of crypto.
• The US is still much further ahead, having poured $30 billion into crypto startups this year. 

Cryptocurrencies have gone mainstream, with millions of Americans having traded and institutions increasingly holding digital assets.

Growth in the valuations of bitcoin, ethereum, and the once-farcical dogecoin helped the market cap of digital coins blow past $3 trillion for the first time in November. Traditional finance houses like JP Morgan and Morgan Stanley have also opened their clients up to crypto investing.

Keen to understand how cryptocurrencies and their associated technologies might change the financial ecosystem, America’s venture capitalists have enthusiastically backed cryptocurrency trading platforms and blockchain-focused startups, pouring around $30 billion into the area in 2021, Bloomberg reported, citing PitchBook data.

Their counterparts in Europe have been more circumspect.

In 2018, London-based firm MMC Ventures had begun research into blockchains — the public ledgers that underpin cryptocurrencies such as bitcoin and ether — and the sector was seen as “speculative and a bit wacky even,” said partner Oliver Richards.

For context, 2018 was also the year US investors enthusiastically valued crypto exchange Coinbase at $8 billion. It would go on to IPO in 2021 at an $86 billion valuation.

“There was a bit of a price correction at the time and people like Jamie Dimon came out calling it gambling, which probably reduced the appetite of VCs,” Richards said of VCs’ cautious approach. “However, the underlying excitement we’ve had has never changed, and digital asset infrastructure is going to enable a new way for financial services to operate.”

MMC went on to invest in cryptocurrency infrastructure startup Copper, and the arrival of startups that focus on the behind-the-scenes tech has gone on to set European interest alight.

Venture capitalists on the continent invested a record $2.2 billion into crypto and decentralized finance (DeFi) companies in 2021, according to data from Dealroom. That’s up considerably on a previous peak of $473 million in 2018. They are backing markets for digital assets such as NFTs; payments infrastructure; and decentralized finance, or DeFi, startups. French soccer-focused NFT-trading platform Sorare became a unicorn several times over in 2021 after it raised a $680 million funding round.

The acquisition of digital assets by traditional financial institutions, the explosion of DeFi as a tangible use case, and the use of NFTs as a form of art and collectibles has helped crypto become more easily understood by the mainstream consumer population, according to Toby Coppel, partner at Mosaic Ventures and a backer of Blockchain.com. 

VCs contend that it’s often the underlying capabilities that cryptocurrencies and digital assets enable which pique their interest in the sector. For example, fintech investors will see the need for tech-led solutions to payments barriers between crypto wallets and platforms — hence interest in startups such as London-based crypto payments firm Ramp, which recently raised $53 million in new funding.

Rana Yared, a partner at Balderton Capital who led the investment, said the broadening of the field for next-generation fintechs and infrastructure meant there were more investable companies than ever before in Europe. 

“Throughout this passage of time we’ve invested in important companies in the digital asset space and there is now more of a mainstream conversion use case,” she said.

“As a generalist fund, we look at prevalent themes in the market and ask ‘is the innovation enough here to move the tech forward?’”

For Europe’s investors, the balance has increasingly tipped towards the affirmative.