State of Crypto M&A: Update & Survey

Following up on our landmark M&A research piece for 2019 we provide a few insights on what’s been happening so far this year.

M&A slowdown

There has been a slowdown in Crypto M&A activity, contrasting our initial expectations and those of industry executives and investors. Nonetheless there have been a few notable deals:

• Circle sold its retail business to crypto broker Voyager continuing its divestment program
• Bakkt bought loyalty solutions company Bridge2 which is remarkable since Bridge2 is a non-crypto company
• Kraken bought Australian exchange Bit Trade in another consolidation power move by the high profile exchange 
• TRON acquired DLive (video streaming) and Steemit (blockchain social network)  

Key industry executive M&A Survey

Over the past month we have collected the views of key industry executives and investors and have summarized the findings in a new report that you can download on our research portal:

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• 2020 will be the year of M&A: A majority of all survey respondents expects 2020 M&A activity to outpace 2019. 
• >75% of founders were involved in M&A discussions: We were surprised to see that such a large majority of founders were active on the M&A front – both as targets and buyers. However, most of these discussions didn’t end up in actual deal activity. This is from A-list entities, and we can only guess how much is going on at the long-tail of crypto startups. 
• Deals “bounce” because of many reasons that are not about price: Whereas analysts will often focus on the price of a deal, founders have reportedly turned down offers due to non-economic reasons such as branding and the need to relocate their business. 
• What data room? The “wild west” image of many crypto startups is visible in some deals not closing due to targets being unable to pass basic due diligence procedures. 
• Will the Goldman Sachs of Crypto please stand up? Most deal activity and advisory is done in-house, or by executes of the large incumbent companies. When asked about influential dealmakers, survey respondents failed to mention an independent crypto M&A dealmaker.
• When Decentralized M&A: 1 in 5 respondents thought that there will never be a case of Decentralized M&A (e.g. protocol takeover, independent of centralized party)

More in-depth updates will be available in the next edition of our State of Crypto M&A report which is due later this month. 

Crypto ≠ risk pandemic vaccine

Choosing between selling n95 face masks in exchange for stablecoin and publishing data driven insights about crypto, we clearly prefer the latter. In this update we shed light on exchanges (Deribit and FTX) looking to set the benchmark for crypto vol trading and carve a niche ahead of the incumbents.

Wars, pandemics, and crypto volatility

If you’re active in crypto like us, you are inclined to think about financial markets, “black swan” events, and exponential events. Nassim Nicholas Taleb and Naval are our saviors. The first quarter of this new decade has given us plenty of geopolitical events that have caused many crypto pundits to salivate and want their cake and eat it.

1. “Rooting for WW3 and BTC all-time-high” – The assassination of an Iranian general by the US in January and subsequent tension in geopolitics was paired with an uptick in price and plenty of “BTC is a safe haven” comments from your crypto twitter pundits.
2. “Party like it’s 1999” –  Bitcoin crossed 10k in February while equities, tech stocks and risk-assets rallying in dot-com fashion. Familiar memes like “This time it’s different”, “Institutions are coming” and “This will be the last time Bitcoin will cross 10k” popped up everywhere. 
3. “Want a slice of lime with it?” – While the crypto community has done an amazing job analyzing and debunking stories about corona/n-covid 19 most of us have been silent about Bitcoin prices falling in line with risk-on assets while gold and treasuries have rallied. Until mask manufacturers start accepting bitcoin as a means for priority delivery or all of Asia refuses to touch cash, crypto as pandemic-hedge seems far fetched to us. 

This market volatility has benefited the incumbent (spot) trading venues. Coinbase and Binance have seen volumes bounce up in the first two months of the year. However, the more impressive growth comes from the derivatives exchanges that focus on crypto volatility products.

2 phases of volatility trading

Taking a simple approach, we distinguish between two phases of crypto volatility trading:

1. In phase 1 of crypto volatility trading, exchanges offer the ability to trade on margin and leverage for people who want to get even more exposure to the volatility of the underlying cryptocurrencies. Bitmex is the best example of leveraged crypto trading for retail punters and CME and Bakkt set the standard for “old fashioned” financial institutions wanting a little go at Bitcoin through cleared futures.
2. In phase 2 of crypto volatility trading, exchanges offer instruments that allow volatility itself to be traded through options, straddles and volatility indexes. 

Two exchanges have emerged as the pioneers of phase 2 through significant growth and innovative product offerings: Deribit and FTX