After the extraordinary challenges of 2020 – which included the coronavirus pandemic, the polarizing presidential election and the increased awareness of racial injustice in the U.S. – dealmakers are eagerly embracing 2021 with open arms. It may turn out to be a spectacular year for M&A. The high level of activity experienced at the end of the old year is expected to continue in the new year. At Mergers & Acquisitions, the editorial team has identified four sectors in which we predict activity will be especially high in 2021: Logistics, Cryptocurrency, Telehealth and Education Technology.
Here’s Our Forecast for the Cryptocurrency Sector
Following a year in which the price of Bitcoin skyrocketed 175 percent by mid-December – taking hundreds of digital assets along for the ride – crypto-related merger activity may soar in 2021. The sector is changing quickly and may soon see its most significant initial public offering in Coinbase. Nothing in finance may ever be the same.
Bitcoin’s price (starting the year below $4,000, ending above $22,000) is an obvious accelerant but there’s also greater institutional buy-in, as well as legions of traditional financial institutions and upstart fintech firms rushing into digital money, and towards one another.
At the center of the action are Digital Currency Exchanges through which the world’s Bitcoin, as well as dozens of other digital currencies, such as the second-largest crypto, Ether, the token connected with the Ethereum blockchain, are bought, sold, stored and converted into other digital or fiat currencies. Coins that are not Bitcoin are often collectively called “altcoins” – and there are literally thousands of them.
“Segments in which we would expect to see higher levels of activity include companies that are involved in building the underlying infrastructure for the entire digital asset ecosystem,” said Michael Ashe, head of investment banking at Galaxy Digital, a multi-channel financial services firm specializing in crypto and blockchain. “The space is maturing.
Crypto Comes of Age
To recap: computers were invented, enabling information to be stored and transmitted electronically, resulting in the creation of databases which by the early 1990s had splintered into sub-categories, including decentralized protocol-sharing/record-keeping-type databases, one of which was called a blockchain because as new data comes in, it gets entered into a fresh block; this type, in turn, led to a specific blockchain use: as a ledger for transactions.
Immutable, controlled by no one and everyone, the first actually utilized shared ledger protocol to be built on a blockchain was called Bitcoin, launched just after the financial crisis in January 2009 as a way to birth and circulate a “new electronic cash system, fully peer-to-peer, with no trusted third party,” as Bitcoin’s pseudonymous creator, Satoshi Nakamoto, put it.
Early on, as the value of one single Bitcoin hovered at about a nickel, enthusiasts (computer nerds) swapped the virtual coins – encrypted data files, transferred from one address to another – over friendly forums. Inevitably, bad actors entered into the picture. Soon enough someone figured out there would be a role for a trusted intermediary.
The now-defunct Bitcoinmarket.com launched in March of 2010. Another early Bitcoin exchange was Japan-based Mt. Gox Co., which for several years had a monopoly on trading volume of the digital coin with the ticker “BTC” as it jumped from $5 to $250; in 2014, Mt. Gox collapsed amidst reports of hacking and fraud. New entrants rushed to fill the Digital Currency Exchange vacuum and they kept coming. BTC kept rising.
Watch This Space
The DCE space has since grown into a far-flung, cyber-carnival of large and small, centralized and decentralized – increasingly autonomous, even anonymous – platforms. Binance, Coinbase and Kraken are among the largest, best known and the most acquisitive as digital assets enter the mainstream.
For example, this past summer, Binance – which is expected to record $800 million in profits by the time this year is over – acquired a crypto wallet, Swipe.io, a smart phone app. Swipe true to its name allows users to purchase items using Visa debit cards. The cards automatically convert stored crypto into fiat currency for use within the Visa payment network, connecting old and new ways and means of paying for stuff.
In something of a watershed transaction, Gibraltar-based crypto exchange startup INX Limited just pulled off, with the blessing of the Securities and Exchange Commission, the first-ever initial public offering done via a tokenization. INX, instead of selling shares, sold coins that were minted via the Ethereum blockchain; out of a total circulation of 200 million digital INX tokens, some 130 million were available for purchase by the public at 90 cents apiece. INX set out to raise $117 million, earmarking 60% for liquidity reserves while using the rest to acquire other platforms so as to create, from a clean sheet, a full-blown ecosystem for crypto listing and trading.
Parade of Players
For crypto entrepreneurs like INX’s chief Alan Silbert and his brother Barry (an early investor in Coinbase and the founder of crypto-conglomerate Digital Currency Group), right now is like being under the buttonwood tree in lower Manhattan circa the early 1790s, except that in terms of designated gathering-spots for crypto speculators there are entire forests of buttonwoods. The sector is Balkanized, booming, cash flush; in other words, ripe for consolidation.
“There is greater appetite for acquisitions, which is matched by an ability to pay for assets among established players,” said Dushyant Shahrawat (pictured), a director of FinTech Investment Banking at New York-based Rosenblatt Securities, confirming sentiment among deal sponsors that crypto exchange consolidation is coming.
The INX and DCG multi-channel, fingers-in-many-pies models could proliferate and expand in the next 12 months; DCG’s tent-pole franchise currently comprises: crypto media company CoinDesk, purchased in 2016; a first-mover crypto asset manager, Grayscale Investments, as well as a digital broker, Genesis Trading.
The potential crypto-space dealmaking parade, as Galaxy’s Ashe explained, contains a rolling line-up not only populated by exchanges but also brokerages, lenders, custody, infrastructure-as-a-service, regulatory/compliance and media/data entities.
The notion of a coming dealmaking spree is fueled by 2020’s eye-popping run for BTC and the broader crypto universe where the 100th largest coin has a market cap of $140 million (compared to BTC’s $420 billion).
The Bloomberg Galaxy Crypto Index, a measure of the largest coins, returned 240 percent in 2020. This index is, of course, heavily weighted (40%) to BTC and to Ethereum’s ETH (34%) with the bulk of the rest in the third largest crypto, XRP, the digital token connected with Ripple, a company seeking disrupt the global banking system by more efficiently facilitating micro-remittances among lower-income masses.
M&A Activity Up
Not unexpectedly, mergers and acquisitions activity in the digital money sector saw a dramatic increase in 2020. According to a November 2020 report published by PwC, the total market value of crypto-related deals during the first half of 2020 ($600 million) exceed all of 2019; the Binance acquisition of CoinMarketCap (estimated at $400 million) caused that spike.
Meanwhile, the second half of 2020 saw some smaller, difficult-to-categorize deals within the decentralized finance, or “DeFi,” space largely being built on Ethereum, and giving rise to myriad applications mostly centered on the trading and liquidity sourcing of more thinly traded cryptos.
Of all the sub-plots in the blockchain narrative there are few as compelling as DeFi. In this nascent realm, developers move at warp speed to disrupt traditional financial intermediaries via blockchains in areas such as micro loans and automated liquidity, services that can fall outside the scope of traditional financial players scrambling to keep up. In a game-changing move this past November, PayPal Holdings Inc. jumped headlong into crypto offerings, putting e-commerce – and dealmakers in this space – on their toes. In 2021, industry analysts say, digital financial behemoths – PayPal, and Square, but also tech giants like Facebook – will set a pace for broader financial services companies in the coming quarters.
As crypto deals increased in 2020, investments focused more on Asian and European digital asset plays while the U.S., per PwC, accounted for less than half of total deal volume.
One reason: U.S. authorities lag global competitors in getting this tiger by the tail. Both China and the European Union have more warmly embraced blockchain; there’s even a digital Yuan trial being conducted by the People’s Bank of China.
Despite the relative lack of regulatory clarity, there are hopes that the new Biden administration is more crypto friendly. The SEC, meanwhile, has indicated a willingness to open the door for exchange traded funds that own crypto. Crypto asset management is an area poised for further growth.
Grayscale, now with more than $10 billion in trust fund assets under management, up from $1 billion in 2018, has pulled ahead of the competition. But both Blackrock, Inc. and Fidelity Investments Inc., seem ready to do more than just bring up the rear. And the Goldman Sachs Group Inc. has burrowed into the crypto space with venture investments in firms such as crypto custodian BitGo which as of press time appeared to be in PayPal’s sights, per a Bloomberg report.
Yearn’s Collaborative Streak
Around the same time that PayPal made waves, in mid-November 2020, the crypto space saw an interesting flurry of activity surrounding a “project” called Yearn.finance.
Started earlier this year by Andre Cronje, a South African financial technology developer, Yearn (connected with a coin with the ticker “YFI”) is an Ethereum-based protocol that facilitates an automated market-making, the crypto equivalent of securities lending but with a transactional points-accrual element to it, a deposit liquidity-creation activity known as “yield farming.”
Yearn, over the course of one hectic week, announced a slew of strategic collaborations with some fellow decentralized exchanges, a sub-niche of the DeFi space. In one of the deals, Yearn merged with Pickle Finance with an eye toward eventually issuing entirely new coins to store the value – that in theory – will be unlocked by two yield farm operators aiding and abetting one another.
Galaxy at Center of Universe
If Bitcoin price movement is driving the crypto bandwagon, one player with a seat up front is Galaxy Digital. Founded in 2017 by hedge fund luminary Michael Novogratz, Galaxy has expanded into merchant banking, asset management and trading.
Galaxy’s M&A group has advised on several prominent transactions, including the sale of Blockfolio to FTX as well as the Canaan and Silvergate IPOs. And in November, Galaxy announced it acquired not one but two Chicago-based crypto trading firms: DrawBridge Lending and Blue Fire Capital.
The rebound in 2020 was welcome after a relatively light 2019 in which there were 125 crypto sector deals worth $481 million, in contrast to 2018 when there were 189 deals worth $1.9 billion, according to PwC.
Galaxy’s Ashe said uncertainty around regulation has kept many companies on the sidelines. But the landscape is changing fast.
This past summer, the Office of the Comptroller of the Currency (OCC) clarified that national banks and federal savings associations can provide crypto custody services. And Wyoming rewrote state rules so as to welcome crypto firms. Kraken has already registered for a bank charter in the Cowboy State.
“The clarity around crypto regulation is attracting new participants,” Ashe said.
New Age Structures
If the pace of crypto take-up gains momentum, deal pipelines will fill and the most ambitious M&A advisors likely will acclimate themselves to getting paid in tokens, rather than fiat cash.
In a noteworthy transaction, European crypto exchange LGO and publicly traded brokerage Voyager recently announced their intentions to wed. No bankers were involved. Consummation will involve tokens issued by each firm co-mingling into a new entity.
For more on Mergers & Acquisitions’ coverage see the following:
M&A Forecast 2021: Logistics Deals Soar, as Covid Fuels E-Commerce
M&A Forecast 2021: Telehealth is Suddenly the Norm, and Deals Follow
M&A Forecast 2021: Education Tech Deals Surge, Driven by Remote Learning