At first glance, it would seem that the cryptocurrency market is dead. Valuations for major coins at exchanges are off by more than 50% since the start of this year. After setting records, the initial coin offerings (ICO) market has cooled down and investment has dropped to all-time lows.
But one corner of cryptocurrencies is thriving.
According to data from JMP Securities, an investment banking and asset management firm, M&A activity in cryptocurrencies has surged by more than 200 percent. Last year witnessed 47 total deals involving blockchain and cryptocurrency-related ventures. This year, that number shot up to 115 and JMP estimated a total of 145 deals will take place before the year is up. Typically, M&A activity takes place across borders and have an average size of $100 million.
Why Is Crypto M&A Booming?
The impetus for a surge in activity is greater awareness of bitcoin and blockchain technology.
In the past year, as cryptocurrency and blockchain technology have gained a mainstream profile, existing crypto players have adopted acquisitions as a way to fast-track their growth plans. For example, the world’s biggest cryptocurrency exchange by trading volume Binance acquired Trustwallet to expand its product offerings. Similarly, Coinbase, North America’s biggest exchange, acquired Earn.com, a crypto social network, for its team.
Established players and private equity investing in cryptocurrencies and blockchain have a different set of motivations driving their acquisitions. Satya Bajpai, leader of Blockchain and Digital Assets Banking at JMP Securities, said organizations are purchasing startups and companies to attempt a shortcut entry into the industry by acquiring technologies and products. “This industry is like a treadmill – the only way to keep up on a treadmill is to keep running by investing in new technologies,” he said. The treadmill’s rapid pace will ensure that small companies are snapped up before they perfect their products. “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,” said Bajpai.
A Discounted Valuation
The increase in M&A activity also has an interesting inverse correlation with cryptocurrency markets. Several startups and early stage cryptocurrency companies piggybacked on the ICO frenzy and crypto market boom at the end of last year to launch token-based projects.
But bitcoin’s dominance and influence on crypto markets have thrown their plans off-kilter. The original cryptocurrency has plunged to lows since the beginning of this year and dragged cryptocurrency markets along with it. The end result is that tokens listed on cryptocurrency exchanges have also crashed, allowing investors and acquiring companies to swoop in and purchase them at discounted prices.
Bajpai from JMP Securities said there was a mispricing of assets in crypto M&A. “Even for great businesses, the value of the token remains correlated to bitcoin, which can create an ideal opportunity for strategic acquirers,” he said.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns 0.21 bitcoin and 1 Litecoin.