Until just recently, mainstream consensus often dismissed the cryptocurrency market as one big bubble. But as recently noted, with more and more big name financial players beginning to trade and invest in Bitcoin and its sister digital currencies, and some even walking back their initial public disdain of the asset class, it's no surprise that corporations, as well as Wall Street, are now more closely focused on the potential profitability of cryptocurrencies and their underlying blockchain technology.
Rising M&A activity engaged squarely in this space signals that, indeed, attention is being payed. And though in some cases, what first looks like market consolidation could also become the next step in strengthening remaining players.
In late February, Circle, a Goldman Sachs backed start-up focused on mobile payments and cryptocurrencies announced that it had acquired the Poloniex exchange for $400 million. "These markets are still in their infancy but they hold enormous promise," Circle co-founder and CEO Jeremy Allaire told CNBC. "There's going to be a huge amount of value creation."
According to CNBC, $1.06 billion was "put into the crypto-economy in 2017." As of the end of February 2018, $323 million in investment capital had already been spent.
In early April, San Francisco-based digital currency exchange Coinbase made headlines when they acquired mobile Ethereum wallet Cipher Browser and earn.com, a social network which allows users to earn and spend Bitcoin. As well, earlier this week a tweet from Cipher Browser indicated that Coinbase will integrate its features into Coinbase's proprietary Toshi mobile browser.
Crypto enthusiasts and investors have noted the increased M&A activity. One just tweeted:
Latest #Crypto acquisitions:
- @circlepay buys @poloniex for $400M
- @coinbase buys @CipherBrowser
- @coinbase buys @earndotcom for $100M
- @BitGo buys kingdom trust
The times are changing
What do tech sector players think? Gaurang Torvekar, CEO and co-founder of decentralized social network Indorse, believes the crypto industry is on the cusp of a rising mergers and acquisitions push:
“Frankly, mergers, acquisitions, and investments make sense for the larger ICO projects that have millions to spare. In terms of technology, mergers and acquisitions assist in the acceleration of time to market, while also increasing a company's own community and user base manifold.
Several VCs and blockchain industry influencers we've spoken to agree. Torvekar points to recent notable acquisitions including by Japan's Monex Group, one of the country's largest online brockerages, which yesterday said it had completed the acquisition of hacked crypto exchange Coincheck; CanYa,which hosts a marketplace for services recently acquired crowdfunding site Bountysource.
In addition, there are protocols such as EOS, NEM, and NEO that have dedicated grants or outright funds to reward and help companies that are working on their protocols or technology stacks.
Robert Gaskell, Chief Operating Officer of the Pillar Project, which is building a cryptocurrency and token wallet, explains that with 675 token companies currently listed on CoinMarketCap, it's clear that many innovative projects are in the works, with many more still to come. It's therefore inevitable a consolidation is due.
“Some projects in the cryptocurrency space have already been acquired—or are in the process of being acquired—by larger groups directly from within the industry or outside of it. M&A activity will speed up over time as more projects mature, prove the market opportunity, and show synergies that can be realized.”
As the space continues to mature, many expect to see more companies attempting to move in and capture perceived market share or thought leadership by buying other companies or teams. Jason English, VP of Protocol Marketing at Sweetbridge, says the practice of acquiring firms for their IP and/or talent is not going to end. In fact, it will perhaps drive some success for meeting the needs of specific industry verticals, such as closed, private trading networks for certain institutions.
It will not prove as effective for creating truly decentralized, open economic protocols that will drive the future. In decentralized ecosystems, projects will still need investment, but the trend will move toward a more participatory approach: collaboration and support of teams working toward like-minded goals. The projects that win may still join forces or merge differently — and use crypto as an incentive to align positive results with customer success, rather than shareholder value or exit strategies.”
According to Aleksei Antonov, co-founder of SONM, there are actually two things going on below the radar, therefore rarely noticed by anyone outside of industry. As he sees it, first, the value and financial acumen of companies in the crypto sphere last year skyrocketed. As a result, startups that were just six months into round A of funding or an ICO, could afford to hire whole teams of professionals or buy necessary technologies at almost any price.
Second, and possibly even more significant for the future of the asset class and blockchain technology, in his view, crypto projects are already participating in M&As, but not in the traditional way of conventional VCs. Blockchain startups, he says, are connected to each other through tokens and equity in ways more intricate than it initially appears:
“After raising money via an ICO, projects then invest it into other ICOs, equity, and exchange traded tokens a few months after. A project that has raised $10.000.000 by the beginning of 2017, has absolutely invested into at least 10 or more projects by the end year, looking for additional profits and hedging the technological risks by buying a competitor’s share or the share of a complementary company.”
All this augers well for digital currencies and the technology that underpins it.