Crypto M&A: Barbarians on the Blockchain

Sunday, November 24, 2019

Crypto M&A – A comprehensive review

Crypto M&A is alive and kicking. 350 acquisitions involving cryptocurrency and blockchain companies have taken place since 2013. However, beyond anecdotes, press releases and high level summaries, there haven’t been any thorough or forward-looking analyses, until now. 

What follows is a condensed version of a full research report that can be downloaded for free:

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Deal Activity 

350 acquisitions involving cryptocurrency and blockchain companies have taken place since 2013. M&A activity peaked in 2018 with more than 160 deals, and we estimate 90-100 deals for 2019.

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M&A activity is volatile and seems positively correlated to crypto prices and industry sentiment. Monthly activity peaked in early 2018 as prices and industry attention soared. 

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Deal Value

We estimate total deal value at $4 Billion since 2013, with $2.8B of M&A activity in 2018 and $700M in 2019. These figures might sound impressive, but are small compared to the total network valuation of cryptocurrency networks ($200B+). This makes sense given the early stage of this industry: most companies are less than 5 years old and a significant IPO seems years away.

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A closer look at marquee transactions and interesting deals shows only one $100M+ transaction in 2019, versus five in 2018. However, 2019 has seen interesting acquisitions such as the acquisitions by Facebook for its Libra project, the consolidation in the crypto custody space (Coinbase-Xapo custody) and the first token merger.

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Token Buybacks: Design or Despair?

Friday, November 9, 2018

Similar to stock buybacks, token buybacks involve a cryptocurrency project buying back its tokens from existing holders. We’ve come across a number of examples and have divided the token buybacks into three categories:

Buybacks Instead of Dividends

Some projects have explicitly mentioned buybacks as a core feature of their business and token economics. The best examples are the successful Asian crypto exchanges (Binance, Huobi, Kucoin) and their respective exchange tokens (BNB, HT, KCS).

These exchange tokens have three functions:

  1. Medium of Exchange / Trading Fee
    Token holders can choose to pay their trading fees in tokens.
  2. Discount Mechanism*
    If token holders pay the trading fees in tokens, they receive a discount on the fees.
  3. Buyback Rights / Periodic Payouts
    The exchanges pledge to use a percentage of revenues/profits for buybacks on a regular basis.

Given the large volumes and revenues generated by these exchanges, the token buybacks have been substantial with Binance and Huobi returning more than $30M back to token holders.

Projects with pledged buybacks

ProjectSectorBuyBacksSourcePost-BuyBackSize
ExchangeQuarterly20% of profitsBurn~ $30M
ExchangeQuarterly20% of RevenuesLocked in Reserve~ $35M
ExchangeQuarterly10% of ProfitsBurn~ $1M
Asset mgmtContinuousVariesBurnN/A

After the buyback, the tokens are burned by a smart contract and/or deposited into a wallet with no private key. As a result, the profits used for the buyback should – theoretically speaking – be fully captured by token holders. In the words of Vitalik – the token’s value is “backed by the future expected value of upcoming fees spent inside the system”.

Or, put simply: the tokens are similar to “traditional” equity because the buybacks ensure that token holders receive (part) of the profits created by the project – just like dividends paid to shareholders**.

Buybacks to Correct Token Allocation

One of the biggest challenges of cryptocurrency projects and ICOs is the initial token allocation. Many projects reserve a fixed amount of tokens to incentivize future partnerships, developers etc. A potential outcome of this “one shot allocation” challenge is that there aren’t enough tokens to hand out a few months/years down the line.

That’s why a handful of projects have started buying back tokens in the secondary market to mitigate this issue. Some examples:

Aragon: The well known DAO project Aragon has been buying its token on a regular basis and has published quarterly reports and guidelines.

Pundi X: The crypto payments and point of sale project Pundi X reported buying ~2000 ETH worth of tokens in June to be put into a partnership reserve.

(more…)