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Industry watchers expect well-funded companies in the sector to seek out opportunities during the downturn
Industry watchers believe mergers and acquisitions across the cryptocurrency sector could accelerate, as healthier players seek opportunities following the collapse of Three Arrows Capital and Voyager.
Mergers and acquisitions (M&As) in 2021 involving at least one company in the crypto sector roughly tripled from the 59 moves made in 2020 to 180, according to data by M&A advisory firm Architect Partners. Such activity in the first half of 2022 slightly exceeded last year’s record pace, as 92 crypto M&A deals were made during the six months.
Kavita Gupta, founder of the Delta Blockchain Fund, said she expects M&A activity to pick up in the second half of the year.
“Many companies may not be able to get through [the current market downturn] depending on how much money they’ve raised and the resources they have,” she told Blockworks. “Similar to the last crash, we will see more and more examples of smaller companies with amazing technology becoming a part of bigger companies.”
Gupta pointed to Polygon buying Hermez to create a better privacy solution as an example. The Ethereum scaling platform made a deal to merge with open-source zero-knowledge rollup Hermez last August.
Gupta reckons Polygon will feature prominently on the M&A front in the coming months, alongside FTX, Binance and StarkWare — all of which raised significant capital before the downturn.
FTX, led by crypto billionaire Sam Bankman-Fried, recently closed a deal to acquire troubled crypto lender BlockFi for $240 million, on top of providing it with a $400 million revolving line of credit.
Early FTX backer Race Capital recently said no other person apart from Bankman-Fried has the ability to win over the crypto market, but others seem eager to try. In May, Ripple CEO Brad Garlinghouse said the company has a strong balance sheet and is on the hunt for potential mergers and acquisitions.
“FTX has certainly played an outsized role in this, with the exchange noting that it has billions of dollars of cash for this very purpose,” Bryan Hernandez, president and co-founder of Structure, told Blockworks.
“Still, it’s unclear how this will play out,” he continued. “For all we know, there are a number of distressed [centralized finance] platforms beyond Celsius, Voyager and BlockFi that could soon signal they’re in such dire straits that they would be open to acquisitions.”
But Hernandez thinks there’s concern within the industry about consolidation, noting that crypto’s ethos focuses on decentralization, maximum transparency and auditability. He described struggles faced by centralized finance lenders such as Celsius and BlockFi as a “gut check,” calling for more decentralized solutions.
Companies traditionally uninvolved in cryptocurrency but curious about the industry are likely targets for acquisitions, according to some.
“I think you’ll see much more of a push into the strategic M&A space,” Rob Flaws, special counsel at Baker Botts, told Blockworks in an interview. Lower valuations for cryptocurrencies alongside crypto companies could trigger more deals.
Flaws noted that positive regulatory moves will help in deal-making decisions, pointing to Joe Biden’s executive order on cryptocurrency and recently announced regulatory frameworks in the European Union and in Dubai.
“Crypto asset trading companies that have good balance sheets will see this as an opportunity to buy some startups whose valuations have decreased, but still have a very strong business model,” Hernandez said.
Larger layer-1 companies, such as the ones powering Avalanche and Solana, are “sitting on a decent war chest,” noted Delta Blockchain’s Gupta, and could seek to acquire talent from smaller companies.
But in Gupta’s world, they could face competition from Wall Street stalwarts. “This is a great time for the Goldman Sachs and JPMorgans of the world — as well as the bigger players in Web2 like Google, Microsoft, Twitter and Block — to acquire Web3 technology and spend $2 million to $3 million instead of the $10 million they would have paid a few months ago,” she said.
Andy Long, CEO of Switzerland-based crypto miner White Rock Management, said the mining space is also ripe for consolidation.
“There are efficiencies of scale to be made in miner combinations and rollups, and I expect to see more than one public miner making acquisitions to accelerate their rollout and realize cost synergies,” Long said. “The exceptionally low current valuations for miners present opportunities for equity deals with significant upside when the market recovers.”
Bitcoin miner HIVE Blockchain said in a statement Thursday it would look to fund expansion plans “during these challenging times” by selling its current production of bitcoin and ether. Contrarily, Hut 8 Mining said last week it would continue to hold its bitcoin.
“Companies with aggressive growth plans will seek to meet their targets or exceed them by acquiring or combining with miners to add geographic diversity and ready installed hashrate,” Long said. “I expect them to be looking for entities with low or zero debt with fleets of latest generation miners.”
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