The Cryptocurrency Crash Could Lead to a Wave of M&A

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Valuations for public crypto companies have fallen by about 70% this year, according to Needham.

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The downturn in cryptocurrencies is expected to fuel a wave of consolidation in the crypto sector during the second half of this year and into 2023, according to Needham.

Valuations for public crypto companies have fallen by about 70% this year, senior research analyst John Todaro told Barron’s. The sector is also in the midst of a crypto crash, which has wiped out about $2 trillion in value in the past several months. This means crypto companies are cheaper now than they were a year ago when the sector was in the midst of an upturn, Todaro said. 

“This could present an opportunity for a traditional company to get their foot in the sector at a lower valuation than they could’ve six to nine months ago,” Todaro said. 

Traditional, or non-crypto-native, companies that have been active crypto acquirers include Animoca Brands, the gaming investment company, which has made three acquisitions in the crypto space, Todaro said in a June 22 note. In May, the exchange operator Cboe Global Markets closed its buy of Eris Digital Holdings (ErisX), which operates a U.S.-based digital asset spot market. According to Todaro, other potential strategic buyers include investment firm CollinStar Holdings; Deutsche Boerse, which operates the Frankfurt Stock Exchange; and online broker Robinhood Markets (HOOD). 

Crypto mergers represent a tiny chunk of the overall deal market. According to Dealogic, 14,667 global announced mergers have totaled $2.2 trillion as of June 22. This compares to just 43 crypto transactions valued at about $6 billion for the same period. The biggest crypto transaction this year is the merger of Coincheck, a Japanese exchange, with special purpose acquisition company Thunder Bridge Capital Partners IV , which Dealogic values at $1.75 billion.

While the downturn represents an opportunity for traditional buyers, Todaro anticipates that much of the dealmaking will be crypto-to-crypto. “The most acquisitive companies will likely be the exchanges,” he said.

Coinbase Global (COIN) has been a leader in buying up businesses, Todaro says. Since it was founded in 2012, the exchange has scooped up 26 companies valued at over $800 million, Todaro said.

FTX, a crypto exchange, has been active recently, agreeing to buy Canadian exchange Bitvo last week, while its affiliate FTX US acquired stock clearinghouse Embed Financial Technologies on Tuesday. FTX is also providing a $250 million credit facility to BlockFi.

Kraken, a smaller rival to Coinbase, has completed a dozen deals, while the crypto exchange Binance.US has done eight acquisitions, Todaro said. Then, there’s Galaxy Digital Holdings , which isn’t an exchange but a crypto-focused financial services firm; it has completed three acquisitions since it was formed in 2018 and has a pending deal for crypto-custody specialist BitGo. The four transactions are valued at more than $1 billion, Todaro said.

Todaro also expects more distressed mergers since it’s harder for businesses to raise money now compared to 2021, he said. Some crypto companies have already started to work with legal firms on restructuring, he added. Celsius Network, the crypto lender that suspended customer withdrawals last week, has hired restructuring attorneys from law firm Akin Gump Strauss Hauer & Feld LLP to advise on possible solutions for its debt issues, The Wall Street Journal reported last week. Celsius and Akin Gump didn’t immediately respond to requests for comment.

Although more complicated than traditional M&A, “restructuring represents an attractive opportunity to buy companies at a deep discount,” Todaro said. 

Write to Luisa Beltran at luisa.beltran@dowjones.com