What might crypto M&A look like in the second half of this year?

What might crypto M&A look like in the second half of this year?

Industry observers believe mergers and acquisitions across the cryptocurrency sector could accelerate as healthier players look for 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 have roughly tripled from the 59 moves made in 2020, according to data from M&A advisory firm Architect Partners. This activity in the first half of 2022 exceeded last year's record pace.

Kavita Gupta, founder of Delta Blockchain Fund, said she expects M&A activity to pick up in the second half of the year.

“Many companies may not make it through [the current market downturn] depending on how much money they have raised and what 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 part of larger companies.”

Gupta pointed out that Polygon bought Hermez to create a better data protection solution as an example. The Ethereum scaling platform made a deal merged with the open source zero-knowledge rollup Hermez last August.

Gupta expects Polygon to play a prominent role on the M&A front in the coming months, alongside FTX, Binance and StarkWare - all of which raised significant capital before the downturn.

Sam Bankman-Fried's deep pockets

FTX, led by crypto billionaire Sam Bankman-Fried, recently closed a deal to acquire struggling crypto lender BlockFi for $240 million, in addition to providing it with a $400 million revolving credit line.

Early FTX supporter Race Capital recently said that no one other than Bankman-Fried has the ability to conquer the crypto market, but others seem eager to give it a try. In May, Ripple CEO Brad Garlinghouse said The company has a strong balance sheet and is looking for potential mergers and acquisitions.

“FTX has certainly played an outsized role in this, with the exchange realizing that it has billions of dollars in cash for this very purpose,” Bryan Hernandez, president and co-founder of Structure, told Blockworks.

“It is still unclear how this will develop,” he continued. “As far as we know, there are a number of distressed [centralized finance] platforms beyond Celsius, Voyager and BlockFi that could soon signal that they are in such dire straits that they would be open to acquisition.”

But Hernandez believes there are concerns about consolidation in the industry, noting that crypto's ethos focuses on decentralization, maximum transparency and auditability. He described the problems of centralized finance providers like Celsius and BlockFi as a “gut check” and called for more decentralized solutions.

How potential acquisitions could be targeted

Companies that are not traditionally involved in cryptocurrencies but are curious about the industry are likely targets for acquisition, according to some.

“I think you're going to see a lot more of a push into the strategic M&A space,” said Rob Flaws, special advisor at Baker Botts, in an interview with Blockworks. Lower valuations for cryptocurrencies alongside crypto companies could trigger more deals.

Flaws noted that positive regulatory moves will help with business decisions, citing Joe Biden's executive order on cryptocurrency and the recently announced regulatory frameworks in the European Union and Dubai.

“Crypto asset trading firms with good balance sheets will see this as an opportunity to buy some startups whose valuations have fallen but who still have a very strong business model,” Hernandez said.

Other potential buyers

Larger Layer 1 companies, like those that power Avalanche and Solana, “sit on a decent war chest,” noted Delta Blockchain’s Gupta, and may look to acquire talent from smaller companies.

But in Gupta's world, they could face competition from Wall Street stars. “This is a great time for Goldman Sachs and JPMorgans around 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 mining company White Rock Management, said the mining space is also ripe for consolidation.

“There are economies of scale to be achieved in miner combinations and rollups, and I expect to see more than one public miner making acquisitions to accelerate their adoption and realize cost synergies,” Long said. “The exceptionally low current valuations for miners provide equity trade opportunities with significant upside potential as the market recovers.”

Bitcoin miner HIVE Blockchain said in a statement on Thursday it would seek to fund expansion plans "during these challenging times" by selling its current production of Bitcoin and Ether. Hut 8 Mining, on the other hand, said last week that it would continue to hold its Bitcoin.

“Companies with aggressive growth plans will look to meet or exceed their goals by acquiring or merging with miners to add geographic diversity and ready-installed hashrate,” Long said. “I expect they will look for companies with little or no debt with fleets of state-of-the-art miners.”

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The post What might crypto M&A look like in the second half of this year? is not financial advice.