Last year was a bad year for crypto. Many ICO’s saw the funds they raised massively depleted by the drop in the price of Ethereum and the crypto market in general. Another issue has been that even ICO’s whose fundamentals are good and are profitable have seen their token prices fall in line with bitcoin, dragged down by overall market sentiment. This strange situation has created the perfect climate for a spate of mergers and acquisitions.
The crypto industry is in the midst of a “land grab” for innovative technology and access to new markets as conditions are ripe for strategic acquirers. Through these mergers and acquisitions firms with can get new intellectual property and onboard talented employees. Some of these acquisitions are by existing players in the crypto world and others are traditional corporate entities that are essentially buying their way in to the sector.
Satya Bajpai of JMP
“As soon as a company becomes interesting, they get bought — the deal size may still remain small, but the number of deals will increase because that’s the most viable and fastest way to grow in this environment,”
Those with cash to spare who are looking for a deal have been undeterred by the state of the crypto-market and are instead fueled by the desire to bag a bargain.
Mergers and acquisitions have hit record levels in the crypto world in spite of the ongoing bear market that dogs the sector.
Data from PitchBook suggests that the total amount of blockchain and crypto-related deals increased by an impressive 200 percent at an annualized rate last year alone. This occurred in conjunction with a 54 percent loss of value for bitcoin.
Data suggests over 115 deals involving cryptocurrency or blockchain were announced and was on track to hit 145 by the end of 2018. The count is up significantly from the 47 total deals completed in 2017 when bitcoin’s price was at its all-time high of almost $20,000.
Data regarding the size of the deals are scarce as most have occurred behind closed doors. However, JMP Securities has stated that the majority of transactions are global in nature and “relatively small” with the average deal being less than $100 million US dollars.
The correlation between the price of Bitcoin and alt-coins at large is the primary driver behind the dramatic increase in mergers and acquisitions. With the market cap down over 65 percent and trading volumes down around 55 percent some recent startups are being seen as significantly undervalued. The so-called “crypto-winter” has created a disconnect between value and valuation especially for early-stage companies.
Although Bitcoin has
just had its tenth birthday. The concept of the ICO has only really
taken off in the last four years. It is a quickly changing nascent
industry and buyers seem to have decided that purchasing an
undervalued startup represents good value not only because of the low
price but because it negates the need to start from scratch. Late
entrants to the world of crypto can simply buy their way in on the
cheap at the moment.
“It’s expensive, but you get the technology and product immediately,” Bajpai said. “This industry is like a treadmill — the only way to keep up on a treadmill is to keep running by investing in new technology.”
In the current market, talented blockchain engineers are hard to come by and it can be even more difficult to find employees that possess both business and technical backgrounds. When you purchase a going concern you can hit the ground running rather than having to waste valuable time and resources setting things up from scratch.
Bajpai of JMP has
pointed to Coinbase buying Earn.com, which lets users send and
receive digital currency for replying to emails and completing tasks.
As a part of that deal, Earn’s founder and CEO became Coinbase’s
first-ever chief technology officer.
Communities and users are another valuable part of the strategy. Companies have found they are able to add users, which is a key part of any tech start-up’s valuation, almost immediately through an acquisition.
Attempting to work out
the valuation of some of these startups can be a complex process,
especially when that company has raised its capital through an
initial coin offering. If the company has sold utility tokens then
the holders of this are expecting a promise of future use of the
platform or some sort of payoff. Whilst institutional investors may
see value in buying a startup’s associated utility token they are
much more likely to want an equity stake in the aforementioned
A lot of these acquisitions are occurring before the companies in question have been able to prove themselves in the free market. As soon as a company becomes interesting it will attract the attention of investors regardless of if it has made a profit or even proven its utility case. As long as crypto remains in the doldrums it would seem that the amount of these mergers and acquisitions is going to increase even though the deal sizes will remain small.
What is not beyond possibility is that a large player in Silicon Valley will make a play for a crypto-giant. Is Facebook or Amazon purchasing Coinbase such an outlandish idea? If we start to see mergers and acquisitions of players on this scale it will almost inevitably result in a brand new crypto bull run.