Mergers And Acquisitions: The Next Big Trend For Cryptocurrency Firms?

One area of ongoing buoyancy during the current crypto winter has been merger and acquisition (M&A) activity in the digital currency and blockchain space. According to global crypto finance company Circle, which recently released its inaugural Circle Research Crypto Retrospective for 2018, blockchain-focused M&A is projected to grow over 300% year-over-year.

Within that statistic there's a particular trend worth noting: the significant number of crypto exchanges acquiring publicly traded, non-crypto companies. Known as reverse mergers, publicly traded companies are being snapped up by privately held, cryptocurrency businesses, in order for the closely held company to bypass the complex and time-intensive IPO process, thereby becoming a listed company via the merger.

Is this a strategic effort to legitimately diversify, or a marriage of convenience between two entities that have nothing in common, allowing crypto firms to buy their way directly into mainstream markets?

There's no simple answer. Jehan Chu, managing partner at Kenetic and co-founder of Social Alpha Foundation, a not-for-profit grant making platform sees the phenomenon as an exercise in problem solving for some acquirers:

"Coinbase's acquisition of anti-fraud startup Neutrino, Kraken's purchase of Crypto Facilities for an estimated $100 million, or OKCoin spending $60 million on a Hong Kong-listed company, exchanges are feeling regulatory and technology pressure, and are on a shopping spree for solutions.”

Indeed, notes Chu, crypto exchanges have been aggressively pursuing reverse mergers. “Top crypto exchanges are cash rich. And they are urgently seeking ways to deploy capital to diversify and de-risk their business.”

As well, Chu explains, crypto firms are seeking wider access to capital through public markets, with several large companies such as OKCoin, Huobi, and ANX following Galaxy Digital's 2018 reverse listing and acquiring listed companies. “While this route has shown success in other industries, the jury is out on the public market's appetite for blockchain stocks in the near term,” says Chu.

Traditional Tech Looking to Implement Blockchain

There's another area of M&A activity that's also heating up: traditional tech companies are looking to implement blockchain within their already established ecosystem. Chandler Song, CEO of Ankr, a distributed computing network that leverages idle resources in data centers, notes:

“Last year it was reported that crypto-related deals increased more than 200 percent while the crypto market itself plummeted. It seems the industry is at a crossroads and the blockchain ecosystem appears to be forking, with many projects using this prolonged bear market to focus on technical developments.”

Song highlights recent deals including Coinbase's acquisition of the decentralized ERC20 trading platform Paradex, and Earn.com and Goldman Sachs-backed Circle acquiring cryptocurrency exchange Poloniex. Says Song:

“Growing interest from traditional tech firms is also boosting M&A activity with Facebook (NASDAQ:FB) acquiring blockchain startup Chainspace. Industry giants such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) are pushing ahead with the introduction of blockchain on their public cloud infrastructure as they look towards enterprise adoption.

Not to be shown up by their more established counterparts, existing crypto start-ups also have their sights set on the mainstream. Trade.io acquired British brokerage firm Primus Capital Markets to offer BTC-backed Forex trading,”

Sidestepping Regulatory Hurdles; Purchasing Legitimacy

Crypto firms may also be taking the reverse merger route to sidestep regulatory hurdles, as well as to purchase legitimacy after years of negative headlines about crypto exchange hackings and shady transactions have tainted the sector.

Ramon Ferraz, CEO of 2gether, a banking platform backed by Big Four auditor KPMG, says the word ‘crypto’ has a negative connotation and some crypto companies are well aware of the fact.

“For a crypto company, it is easier to get mainstream acceptance by acquiring a stake in a mainstream company, even listed companies, as in the case of reverse mergers.”

David Wachsman, CEO of professional services firm Wachsman, says all this is a natural evolution as acceptance of the digital asset class gains traction and matures. “It is likely that a more open dialogue between crypto and corporate entities will see some enterprise giants enter the M&A ring, as the blockchain industry further separates itself from cryptocurrency market volatility,” he adds.

"This transition is good for the entire cryptocurrency ecosystem," says Stefan Neagu, co-founder of Persona.

“The crypto ecosystem is transforming and there is a need for better, more sophisticated products or services. [Exchanges] tend to either consolidate their position, like Kraken is doing, or they tap into new business lines since they are standing on a huge pile of cash even if it’s in the form of cryptocurrency.

Exchanges are an intermediary, something that blockchain technology makes obsolete by eliminating the middleman. And if until now the exchanges were doing nothing more than collecting fees, now they have to rethink their strategy and actually push on the innovation pedal.”