Crypto Fintech & e-commerce

Mergers & Money: A Drop In Venture And Sagging Crypto Values Could Spur Dealmaking

Editor’s note: Mergers & Money is a monthly column by Senior Reporter Chris Metinko that covers dealmaking and the flow of venture capital.

The crypto market has seen pretty much everything this year—declining currency values, a drop in funding, the collapse of some coins and bankruptcies of some significant players in the industry.

Up next could be a spike in M&A dealmaking.

Crypto has not seen a massive amount of dealmaking, likely because the industry is still relatively young. However, the decline in the venture capital market combined with the drop in cryptocurrency prices could put pressure on companies seeking a way to stay alive.

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“I absolutely expect a lot more consolidation in the space with many of the power players who have been profitable with strong balance sheets looking to pick up assets at depressed valuations,” said Yash Patel, general partner at Telstra Ventures.

Deals taking shape

The sector already has seen some notable dealmaking in July. Earlier this month, cryptocurrency exchange FTX—in which Telstra Ventures is an investor—signed an agreement to give crypto lender BlockFi a $400 million revolving credit facility that includes an option to buy BlockFi for up to $240 million. The deal represents a significant discount for FTX, as BlockFi raised $350 million at a valuation of $3 billion last March.

That M&A deal was the second largest in crypto of the year, behind the massive $1.5 billion purchase of crypto startup Wyre by fintech unicorn Bolt in April.

However, the FTX deal was not the only noteworthy deal announced this month The following week London-based crypto lender Nexo signed a term sheet that gives the company a 60-day exclusive exploratory period to acquire competitor Vauld.

In announcing the deal, Nexo said, “the current market conditions are to a large degree reminiscent of the Bank Panic of 1907, characterized by excessive leverage in the system, an overabundance of companies in trouble, and no lender of last resort. Today, it is again in the hands of a few capable and well-capitalized entities to come up with systemic solutions and aid the sector. As one of the few companies in a position to help distressed industry participants, Nexo takes this responsibility with the utmost seriousness.”

Much more could be on the way for an industry pacing to have a record year of dealmaking. According to Crunchbase numbers, total acquisitions of companies in the crypto sector through the first two quarters of the year stood at 39—a pace that would easily beat last year’s 66.

About half those deals—20—this year involved venture-backed companies, compared to 22 deals for VC-backed startups all of last year, per Crunchbase.

The deepening crypto winter brought about by plummeting crypto values, the collapse of some stablecoins, and bankruptcies that have rocked the sector could force more founders to look for alternative solutions as venture funding in the industry slows.

“In many cases these M&A deals will not be favorable to existing shareholders and will happen as venture funding continues to dry up for all except the cream of the crop,” Patel said. “To be clear, there have been cases of significant up rounds done with companies such as Magic Eden and FalconX, but those are far and few.

“I do expect many of these M&A deals to happen, but it will primarily be distressed asset sales, where there are synergies for an acquirer to cross-sell into large user bases, proper regulatory licenses are available, and valuations are at cents to the dollar versus any premiums,” he added.

The buyers

Some of the biggest names in crypto have already made deals this year, including New York-based Fireblocks, Boston’s Circle and Los Angeles-based Blockdaemon

However, the biggest player could still well be FTX, which isled by crypto billionaire Sam Bankman-Fried who seems to be on a crusade to help crypto everywhere.

In June, it was reported Bankman-Fried’s quantitative crypto trading firm Alameda Research provided a $500 million loan to Voyager Digital. The crypto lender filed for bankruptcy a few weeks later in an effort to restructure the company.

It also has been reported Bankman-Fried may have his eye on buying asset trading platform Robinhood.

The growing regulatory environment around crypto also could see more traditional finance firms look at the space. With prices falling for many startups in crypto, older financial institutions that have been lukewarm may see now as a good time to make an exploratory buy while prices are low.

Whoever looks to acquire likely will find bargain prices if they hunt long enough—as a crypto winter could spring into a lush dealmaking season.

Illustration: Dom Guzman

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