This post was last updated on February 6th, 2020 at 01:47 pm
Quotes"M&A is often used as a way to overcome regulatory hurdles. All these big exchanges, @coinbase and @krakenfx, have acquired non-#crypto companies for the regulatory licenses they have." ~Ricky Tan, founder of @TokenData Click To Tweet "The subsequent price collapse and recovery have created a climate in which strategic M&A, especially M&A conducted by exchanges, looks very strong going into 2020." ~Ricky Tan, founder of @TokenData Click To Tweet "It's been the #cryptocurrency exchanges, @coinbase, @krakenfx & @binance, that are the most prolific strategic acquirers. And most of these acquisitions just focus on talent and technology." ~Ricky Tan, founder of @TokenData Click To Tweet
Welcome to this conversation with Ricky Tan, founder of TokenData, a research organization focused on token sales and crypto mergers and acquisitions. TokenData recently released a report, Barbarians on the Blockchain, detailing the 350+ crypto mergers and acquisitions that have taken place since 2013. Armed with this data, Ricky gives us the state of crypto M&A and considers the future of the practice.
The conversation is split into 3 chapters:
- Chapter 1: The state of crypto M&A
- Chapter 2: Driving forces behind crypto M&A activity
- Chapter 3: A Q&A covering acquihires, crypto exchange consolidation, and TokenData’s business model
Topics Discussed In This Episode
- How TokenData got started in crypto M&A
- The history of crypto M&A (2013 – present)
- Acquihires vs. asset acquisitions
- Different types of crypto M&A
- Why 2018 was such a big year for crypto M&A
- Financial M&A vs. strategic M&A
- How crypto firms can use reverse mergers to get publicly listed
- M&A as a way to overcome regulatory hurdles
- When exchanges like Coinbase acquire crypto startups
- Decentralized M&A
- The first token mergers
- The global nature of crypto M&A
- Why crypto exchanges haven’t consolidated – yet
- Where TokenData gets its information
- TokenData’s business model
Links Relevant To This Episode
- Popular Crypto Weekly Newsletter
- Clay Collins
- Ricky Tan
- TokenData on Twitter
- TRON (TRX)
- Augur (REP)
- Bitcoin (BTC)
- Stellar (XLM)
- TRONAce (ACE)
- Ethereum (ETH)
- USD Coin (USDC)
Clay: Welcome to Flippening, the first and original podcast for full time, professional, and institutional crypto investors. I’m your host, Clay Collins. Each week, we discuss the cryptocurrency economy, new investment strategies for maximizing returns, and stories from the frontlines of financial disruption. Go to flippening.com to join our newsletter for cryptocurrency investors and find out just why this podcast is called Flippening.
Clay Collins is the CEO of Nomics. All opinions expressed by Clay and podcast guests are solely their own opinion [00:00:30] and do not reflect the opinion of Nomics or any other company. This podcast is for informational and entertainment purposes only and should not be relied upon as the basis for investment decisions.
Welcome to this conversation with Ricky Tan, founder of TokenData, a research organization that focuses on ICOs, token sales, crypto mergers, and acquisitions.
I should note that this episode was recorded in front of a live audience. If you’d like to attend a live Flippening Podcast recording and [00:01:00] directly submit interview questions to guests, then please go to flippening.com and subscribe. After you’ve subscribed, we’ll be sure to send you email notifications before live recording sessions so you can join us. Space is limited to 100 attendees per recording, so go to flippening.com to subscribe and join us for the next live recording of this podcast.
With that established, let’s get back to our guest presenter. Ricky’s company, TokenData, recently released a report entitled, Barbarians on the Blockchain, named for the quintessential book [00:01:30] on M&A entitled, Barbarians at the Gate. In the report, TokenData attempt to account for every single merger and acquisition that occurred in the crypto space since inception. Armed with this data, Ricky gives us an overview of the current state of crypto M&A and answers our questions about the current and future states of M&A markets.
My conversation with Ricky is split into three chapters. In chapter one, Ricky gives us the state of crypto M&A. In chapter two, we cover the driving forces behind crypto M&A activity. And in chapter three, [00:02:00] we cover acquihires, the lack of consolidation by crypto exchanges, and TokenData’s business model. Also, the transcript and show notes for this episode are available at flippening.com/ricky.
We’ll get to the episode in just a second, but before we get started I’d like to pause for a moment to tell you that this episode is brought to you by the good folks at CryptoTrader.tax.
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Ok back to our regularly scheduled program. Here’s my conversation with Ricky Tan from TokenData. Enjoy. [00:06:00]
Let’s kick things off with chapter one, the state of crypto M&A. Ricky, could you explain how TokenData started tracking crypto M&A activity? And then from there, could you describe for us the state of M&A in crypto? For example, how many deals have happened, what kinds of deals have happened, et cetera?
Ricky: It was about [00:06:30] a year, year-and-a-half ago when we noticed a big uptick in M&A activity in the space. You’re talking about early- to mid-2018 when a handful of nine-figure M&A transactions were going through in the market. Coinbase buying, earn for a reported $100 million, Circle buying Poloniex for north of $350 or $400 million. And that really sparked our […].
In addition to that, some of our [00:07:00] research clients asked if we had data since we’re TokenData and if we had M&A data in our database (which at the time we hadn’t). As with everything in a nascent industry like crypto, the frustrating thing is that there isn’t actually a lot of data available. Over the past year-and-a-half, you really start to put together a very comprehensive database on everything that has to do with [00:07:30] crypto/blockchain/distributed ledger companies being involved in mergers and acquisitions. And we believe that by now we have captured probably the biggest database connected to this.
There have been more than 350 deals in crypto and blockchain space since 2013. These 350 deals are representative of approximately $4 billion of value that has exchanged hands, but the striking thing is that the average deal value is fairly small at [00:08:00] $10 million per deal. The most active year of M&A transactions was 2018, the most active acquire (unsurprisingly) to many is Coinbase, and the most common form of acquisition is the called acquihire or an acquisition to essentially gain talent for the acquirer’s company.
The single largest transaction that has happened to date was Circle acquiring Poloniex a little more than [00:08:30] a year ago over a year ago. That deal was valued at $400 million but in the recent month that is November–December 2019, this deal has actually been, I wouldn’t say contentious, but it’s been subject to another set of transactions because Circle has spun out Poloniex to a consortium of buyers backed by Justin Sun of the TRON blockchain, and actually yesterday Kraken [00:09:00] announced that they had bought Circle’s OTC trading desk.
All of this just shows that it’s a very exciting space, the M&A part of the crypto industry, but it’s also very much a space that is very much in flux because Circle’s buying Poloniex for 400 million, but a year later they’re essentially spitting out all these business units.
Clay: You mentioned that the most popular type of deal was an acquihire. [00:09:30] How do you judge whether or not something is an acquihire versus an asset acquisition?
Ricky: The acquihire acquisition are pretty easy to spot because they tend to happen very early in the target company’s fundraising stage. There’ll be seed companies or maybe a Series A from the company. Typically, fewer than 20 people work at that company and in a lot of cases, [00:10:00] the company might not have launched an actual project. They might have just announced something on Twitter that they’re working on something exciting in the crypto space or they will have launched something on Testnet. But you can definitely tell that it’s not a revenue-generating company yet. All these acquihires tend to be very small, low value, but nonetheless very exciting and all.
Usually, when you talk about [00:10:30] crypto M&A and when other data news providers and the popular press looks at crypto M&A numbers, they only focus on deal activity. Deal activity is literally just how many deals have taken place in the past month or a year. From that perspective, 2018 was an absolute banner year because in 2018 more than 150 M&A deals took place in the crypto/blockchain space.
Ever since in 2019 (and we’re now [00:11:00] two weeks from the end of 2019), we’re counting about 90 deals. It’ll probably end up at 100 deals for 2019. Most of the popular press just says “Well 2019 hasn’t been a good year, surely based on the fact that there have been fewer deals in 2019 than in 2018.”
This is actually not the case and the reason behind that is that there’s not just one type of M&A. There’s all these different types of M&A and [00:11:30] we actually find that if you go deeper into analyzing every single transaction and you look at the players involved, the conclusion is that the M&A space in crypto has really kicked off.
We actually started a survey with a handful of VCs and key industry execs about what they’re seeing in this space right now. They’re all saying that there’s a lot of players active in M&A and everyone’s expecting more deals to take place in 2020. [00:12:00]
The first easy thing for us to do was to just look at how does deal activity, how does it look not on an annual basis but on a more granular monthly basis? And if we look at M&A activity on a monthly basis we see that it’s extremely volatile. In the most active months in 2018, we saw more than 20 deals per year in the darkest and coldest of crypto winter that slipped to [00:12:30] two or three deals a month. From that perspective, we decided what happens if we just plot monthly deal activity versus the average price of crypto?
It was striking how positively correlated it looks on firsthand. It really just seems that a higher price indicates that crypto companies are earning more money, hence that’s more funds to deploy to acquire other companies [00:13:00] and/or other if the crypto hype is and the crypto frenzy was at its peak in 200 (let’s say late 2017 early 2018), everybody wanted to get involved in crypto and for a lot of non-crypto companies that just meant, “Let’s just acquire some small crypto startups to get that talent on board.”
Obviously, a very important question is how much value hasn’t changed hands? What we did is for every deal, [00:13:30] either we approach the target involved or some of the investors involved to get a sense of how big that deal was in dollar terms. For the ones that we couldn’t confirm, we just extrapolated the data that we had collected to come up with a range of value estimates for every single transaction.
Using that methodology, we estimate that about [00:14:00] $4–$4½ billion of value has exchanged hands through M&A since we started measuring this from going back to deals in 2013. Not surprisingly, though, more than 75% that made $3.5 billion out of the $4.5 billion has taken place in 2018 and 2019, and especially in 2018 when deal value is estimated at $2.8 billion.
As an absolute number, [00:14:30] this might sound very impressive but it’s actually small compared to the total network valuation of crypto. For us, this makes sense because crypto (again) is still an early-stage industry. Most companies are less than five years old. Significant IPO seems years away. From all of our discussions with the venture capital funds that have been involved in M&A deals, it’s still not enough to return even just a handful of the bigger [00:15:00] crypto VC funds out there. So, M&A has been taking off, M&A is important, but it’s not a viable exit strategy yet.
Clay: Can we talk a little bit about why 2018 was so active? Was there a lot of activity from crypto startups that maybe had raised funding during the bull market and during the bear market found that they needed some respectable way to close down the company, [00:15:30] and a Bay Area acquihire might be the best way to do that, and the prices were so low that it was a no brainer for Coinbase and others? Is that what was happening in 2018 or are there a few other big deals that drove most of that?
Ricky: Let’s say in value terms, most of the value has been driven by the nine-figure deals that took place in early 2018. We had six [00:16:00] nine-figure deals in 2018 that represent more than $1 billion of deal value. When it comes down to the acquihires and (let’s say) the high-velocity strategic acquisitions, that has been pretty steady in 2018 and 2019. 2018 was an outlier in the fact that you still had the tail end of the bull market and a lot of this [00:16:30] M&A activity is a lag reaction of 1–3 months of what is actually happening in the market, and then the latter of 2018 was really fueled with the smaller startups being absorbed by the bigger exchanges or just merging with each other.
Clay: That brings us to chapter two, what drives crypto M&A. Ricky, could you talk a little bit more about the reasons behind crypto M&As? What are the discernible trends? What’s driving the activity? [00:17:00]
Ricky: We basically took another look at all the deals that took place in 2018 and 2019, and followed a few interesting trends. The first one that’s been very obvious to everyone is that exchanges such as Coinbase and the Circle Poloniex deal of 2018. it’s been really the exchanges that drive most of the activity and value that is occurring in crypto M&A.
Then another interesting [00:17:30] trend is that M&A is actually a very, very powerful tool for non-crypto companies getting crypto developers on board. The best example is Facebook buying a small blockchain outfit called Chainspace. That team actually ended up working on the Libra/Calibra projects. M&A is actually very good for non-crypto [00:18:00] tech companies who want to enter or get exposed to the crypto space.
The last trend we are seeing some protocol and ICO development teams engaging in M&A, the most obvious deal being TRON acquiring BitTorrent for $125 million quite a while ago already. That was the first big deal done by an ICO-funded team and we’re starting to see [00:18:30] way more of that. That is definitely one of the most interesting aspects of the M&A space and it’s also one that I personally really look forward to going into 2020. As a lot of the protocols and apps are starting to… they really have to ask themselves the question of what they’re going to do because they might be running out of money or it has been shown that their networks aren’t doing very well [00:19:00] from a traction perspective.
Usually, most analysis just end here. We know how many deals have taken place and we know how much value has been represented, but pretty much everybody working at TokenData at the moment has a financial services background. I used to be an investment banker and then also a trader on the trading floor. We all said, “Well, let’s just look at all the M&A dynamics from a classical perspective.” [00:19:30]
The first way to really look at M&A in traditional finance is probably just asking what type of M&A are we involved with? What type of buyer are we dealing with? Are we talking about financial M&A or strategic M&A? Financial M&A is essentially a company or a private equity fund, an investment fund, [00:20:00] or a holding company that represents a bunch of investors buying a company, in this case, the crypto startup for the sake of selling that startup 5–10 years down the line or listing as an investment vehicle. That’s what you call a financial M&A where the deal purpose is really only investment returns.
You can pitch that against strategic M&A, which is the M&A that you and I would talk about on a daily basis, [00:20:30] namely, the M&A done by companies for strategic reasons. This is the classical, am I going to merge or acquire a competitor to consolidate the space? Or am I going to acquire this small startup for the talents (the acquihire that we talked about talked about earlier)? Or am I going to buy another company in the crypto space to integrate their technology, (i.e., the same as a vertical integration)? This is what we call strategic M&A.
From that perspective, [00:21:00] it’s actually very interesting what the results showed. When we looked at all the deal activity split by this classification, are we dealing with a strategic buyer or a financial buyer? We see that financial M&A just came out of nowhere in 2017, 30 out of the 50 deals in 2017 were actually financial M&A deals, and in 2018 that increased to [00:21:30] more than 80 deals. In 2019 all these financial M&A deals just almost disappeared. They went from 80 to 20. That’s a decrease of 75%.
We took a closer look at all these financial M&A deals and that’s the ones that a lot of the mainstream financial press really picked on, namely, defunct non-crypto companies like Long Island brand beverages pivoting to becoming a blockchain startup investment holding company [00:22:00] called Long Island Blockchain.
There was another one. You buy a tech company that ended up rebranding themselves to Riot Blockchain and just acquiring this handful of super unknown small crypto companies. I would call it very obscure/opportunistic financial M&A.
Another category that falls under financial M&A are so-called reverse mergers, in which it’s actually the privately-owned or [00:22:30] privately-listed crypto company ends up acquiring a defunct shell company, but that shell company is listed somewhere on an exchange in Canada or in Europe, and through this reverse merger the crypto company becomes a listed company on a small public equity exchange and they can achieve essentially public liquidity for their shares. That was also very popular in 2017 and 2018, especially among crypto mining companies. [00:23:00] The same thing as the opportunistic M&A done by Long Island Blockchain reverse mergers have just dropped off this cliff.
Personally, we think that’s a good thing because the flip side of this negative type of M&A is that strategic M&A that is really done to help the sector move forward and involves real people, technology, [00:23:30] and essentially just this search for product-market fit. Strategic M&A hasn’t dropped by 75% from 2018–2019. Strategic M&A has dropped a little bit. In 2018 we measured 80 deals that we classify as strategic and in 2019 we classified 60 deals as strategic.
From that perspective, we actually think that M&A is alive and kicking. Companies are really [00:24:00] working with M&A as a tool in their strategic toolset to find that market fit and to really get that talent on board, to hopefully become what the next Coinbase or whoever you want to be as a crypto company. We see that as a very positive development in this space.
Clay: One question I have about strategic M&A versus financial M&A is on a dollar basis. I was really surprised to see that there was [00:24:30] much financial M&A activity at all given how formative this space is and how immature some of the markets are. But on a dollar basis, does it also look this? And would you mind sharing some of the larger financial M&A deals that have happened in this space?
Ricky: If I remember correctly, strategic M&A on a dollar basis or in value basis still outpaces financial M&A at least by a factor two. One of the [00:25:00] larger transactions that is (in our that in our opinion) purely financial is the acquisition of a Korean exchange called Bithumb. They were essentially bought by a consortium of buyers in Korea. This consortium bought Bithumb for a reported $350 million and that makes it the biggest financial M&A transaction in the space.
Assuming that the due diligence was correct, [00:25:30] that’s the largest M&A transaction. All in all, you have $350 million for this financial buyout, but then you have Circle Poloniex which was $400 million. You have TRON and BitTorrent for $125 million, Coinbase earned a reported $100 million. So, financial M&A is still out based on a value basis as well.
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Okay, back to Ricky.
Ricky: From that perspective going back to [00:29:00] one of the earlier trends that I highlighted, who are the big players? If you look at activity, it’s the investment funds behind the financial M&A wave of 2017 and 2018 that have contributed to the most M&A activity, followed by exchanges such as Coinbase, Kraken, et cetera. On a value basis, we actually estimate exchanges to have been more active. [00:29:30]
It’s also very logical because exchanges are essentially the most successful businesses in crypto right now. You hear the memes that speculation and trading are crypto’s first killer app next to a hobbling. From that perspective, if your exchange uses Coinbase, Binance, or Kraken, you’ve really benefited from not only the bull run of 2017 and 2018 but just volatility in general. That’s given these exchanges the necessary [00:30:00] cash reserves and networks to just go out there and buy whatever company it is that they find interesting from talent or technology perspective.
What we found very surprising is that mining companies have been pretty dormant in terms of M&A going back to mid- or early-2018. Prior to mid-2018, they were very active in this space but has to do with [00:30:30] the fact that when prices collapse, mining companies just had other things to worry about and/or just had less cash on hand to acquire or merge with other companies.
Clay: Hey this is Clay cutting in from the editor’s booth to explain what mining companies are. Mining companies run computers known as mining rigs to solve complex mathematical puzzles that add transactions to a blockchain. For each block solved, the mining company is rewarded in cryptocurrency. In 2018, the price of Bitcoin fell by approximately [00:31:00] 70%. Other cryptos fared even worse. As a result, many mining companies who foot enormous electricity bills to run their rigs were forced to fold or at least roll back their operations.
Okay, back to the show.
Ricky: And then going deeper into exchanges, this is common knowledge in the space that Coinbase is the leader when it comes down to strategic M&A. We count as many as 16 acquisitions, many of which are on the [00:31:30] smaller acquihire technology side. But 16 acquisitions they’ve engaged in two very big marquee deals involving Earn and through that acquisition, they got Balaji onboard as CTO. It was a couple of months ago they basically bought Xapo’s custody business for a reported $55 million. It shows that Coinbase doesn’t shy away from neither the small nor large deals. [00:32:00]
Coinbase is followed by Kraken, Coinsquare, and Binance as the most prolific acquirers with Kraken now involved in eight or nine transactions. Coinsquare, a Canadian crypto exchange, has been involved in five. Binance has really been on a very active acquiring spree in the past three months, having bought a bunch of [00:32:30] mainly companies in other geographies. They’ve been involved in five acquisitions and behind the scenes, I’m hearing they’re still super active.
It’s very interesting that when you talk about exchanges and crypto trading companies M&A is often used as a way to overcome regulatory hurdles. All these big exchanges, Coinbase, Kraken, and also the institutional companies such as Bakkt [00:33:00] have acquired non-crypto companies for the regulatory licenses that these target companies have. We’ve asked around a bit and most people agree that M&A is probably the most effective tool in getting regulatory compliance for jurisdictions that you might not be familiar with as an exchange.
For example, Huobi bought a Japan-based exchange called BitTrade which had one of [00:33:30] 17 licenses. By that acquisition, Huobi was allowed to start acting as a crypto exchange in Japan. That’s pretty interesting and a lot of people think of regulatory things as boring, but we find it super interesting also from an M&A perspective.
We know who is active. We know it’s mainly exchanges, but why are they active? Why are they buying? Why are they engaging in M&A? [00:34:00] You and I just talked about it already, but the biggest reason is actually talent. It’s the infamous acquihire or the tuck-in acquisition, where it’s really about smaller companies with usually fewer than 20 people valuation, maybe max $10 million, and they’re often pre-product or might have just launched a very early version of their crypto product, and post-acquisition they’re just [00:34:30] completely folded and absorbed by the acquirer. Coinbase has been super active in this space just buying a lot of smaller teams working on very exciting early stage stuff.
Now the last thing that we looked at (and this is pointing out the future) is what we call decentralized M&A. Over the past two years, a handful of crypto luminaries—they’re definitely better well-versed [00:35:00] in the theoretical concepts of the cryptocurrency networks and distributed systems—have theorized what a merger of a decentralized crypto network might look like.
For example, what happens when two betting or prediction market Dapps like Augur and one of Augur’s competitors merge or when two competing privacy currencies try to merge? This hasn’t [00:35:30] happened yet for obvious reasons, that it’s still very early and there aren’t that many truly decentralized crypto networks out there other than Bitcoin. Probably, if you asked for my personal opinion.
But nonetheless, we’ve taken the Liberty to theorize a little bit about what new concepts will emerge if or when the first case of decentralized M&A happens. For the sake of brevity, that’s too much to our discussion right now. I recommend people to [00:36:00] just check out the report that we publish on this themselves.
What we have seen and which hints at where decentralized M&A might go to in the next 2–5 years is that we have seen a flurry of M&A activity by the development teams or the foundations that are developing crypto protocols or Dapps. For example, in 2019 we actually counted more than 10 deals that involved either the protocol development teams [00:36:30] or ICL-funded teams, that ended up acquiring other companies in the crypto space.
There’s a handful of examples out there and you can roughly divide them into three different categories. The first one is a category which we call development acceleration. these are acquisitions by development teams and they’re very similar to acquihires in the fact that you’ll have ICO- or token-funded team A [00:37:00] and they might be struggling with the development of their protocol Dapp and they’ll just buy another development team to help them out.
The second type is an acquisition we call customer expansion. The TRON BitTorrent acquisition is a good example of this, where a protocol- or token-funded team ends up acquiring a non-crypto company or a non-crypto-based network just for their user base. [00:37:30] In the case of TRON BitTorrent, it’s pretty well known that BitTorrent clearly had a big user base, but post-acquisition by TRON, BitTorrent users basically had to use use the BitTorrent token which is on the TRON Blockchain, i.e., the TRON Blockchain just gained X million new users.
The last category of this hint of decentralized M&A is what we call protocol commercialization, in which the development team of an open-source blockchain [00:38:00] ends up acquiring another company to help them with the commercialization, i.e., monetization of their development efforts.
The best example of this is the Stellar blockchain development team has a commercial entity called Lightyear. Lightyear bought Chain, which was a corporate blockchain development company. They merged into this new company called Interstellar that focused on commercial use cases for the Stellar blockchain. [00:38:30]
All of this strictly speaking is not decentralized M&A because you’re still talking about companies and foundations which at their core are clearly centralized concepts. But it is showing that the development of these protocols are being sped up by M&A.
The last thing that I want to highlight is that one of the most exciting things that we’ve seen is the emergence of [00:39:00] the first token merger. One of the mechanisms that people theorize about in decentralized M&A is that instead of equity, clearly, it’s the tokens of blockchain protocol or an ICO-funded network that has to be merged rather than the equity.
In 2019 we counted two examples of token mergers the first one being TRONAce and TRONdice, both of which were [00:39:30] gambling applications running on the TRON Blockchain and they announced that TRONAce had acquired TRONdice. Not a lot of data was available on this transaction, which makes us think it was an inside deal, but with a lot of things that involve TRON this doesn’t surprise us.
The second one was actually for two Ethereum-based projects namely COSS and Arax. In April 2019, these two [00:40:00] ICO-funded companies actually announced that they would merge their projects and they would also merge the tokens. Now we took a closer look at the whole process and the on-chain data of how the token merger actually happened. It showed there was a very messy process where, after a few failed attempts of trying to have token holders’ vote, in the end, the teams, i.e, the two companies involved just set a fixed ratio [00:40:30] at which token holders could swamp their tokens into a new token representing the new entity.
In other words, this decision making doesn’t look very decentralized to me and some on-chain analysis showed that (in the end) approximately $1.5 million dollars worth of tokens were swapped, which, in the grander scheme of things, shows that there’s just the tiny little merger [00:41:00] in the crypto space. Nonetheless, very interesting for the data geeks among us and it shows that there’s a lot of experimentation happening in the space of how tokens are involved in M&A.
If we boil everything down of what I just discussed, we can actually just take a vantage point of six key industry themes that we believe are representative for the whole industry. First of all, if you just look at [00:41:30] the industry maturity, 350 acquisitions have taken place since 2013 and they were presented roughly $4–$4.5 billion worth of value. While this is meaningful within the industry, this is very small compared to the public valuation of cryptocurrency networks and M&A in other tech sectors.
On the other hand, though, we think that this is a good sign because the crypto space is still very young and M&A activity is a reflection of crypto companies iterating and using M&A as a strategic tool. [00:42:00] We saw that volatility is very important in the sense that M&A activities are very volatile and the price run-up in 2017 early 2018 drove a surge in opportunistic financial M&A. However, the subsequent price collapse and recovery have created a climate in which strategic M&A, especially M&A conducted by exchanges, has prevailed and [00:42:30] looks very strong going into 2020.
From that perspective as well, it’s been the cryptocurrency exchanges Coinbase, Kraken, and Binance that are the most prolific strategic acquirers. Most of these acquisitions just focus on talent and technology, which again is a very good reflection of what’s happening in early-stage technology industry.
When we come down to the aspect of regulation, M&A is a [00:43:00] very effective tool to meet the difference in regulatory requirements that a lot of these exchanges space as they expand abroad. With the regulatory landscape evolving at a high speed, we think that M&A will become an even more attractive strategy for exchanges in other crypto companies trying to build (let’s say) their global footprint.
To conclude things, while two decentralized M&As, the merger of decentralized crypto [00:43:30] networks hasn’t happened yet, there have been some hints and signs that development teams are actively acquiring companies to help them transition from what is essentially centralized starting point to more decentralized end state.
We saw the rise of token mergers in 2019, which we believe could be an important mechanism in this uncharted water of decentralized M&A, but that’s such a journey that we still have to go through as an industry that, [00:44:00] at this point, any small activity in this space is just very exciting to me.
Clay: Let’s transition to chapter three, which is a Q&A. In this Q&A, we discuss acquihires, cover why crypto exchanges aren’t consolidating. We’ll also talk about non-crypto companies buying crypto companies and vice-versa, and TokenData’s business model, including how they get their information.
Let’s start off with a question about the acquihires, which you mentioned that most of the M&A activity is related to hiring. [00:44:30] Are most of the acquihires that you’re seeing on the coasts where the talent wars are very real and where (I just saw a statistic) the average length that a developer stays at a Silicon Valley company is around 11 months, are you seeing most of that activity on the coasts or not?
Ricky: It’s actually been pretty global. Obviously, with Coinbase and Kraken being based on the West coast and also involved in a lot of acquihires, yeah. [00:45:00] That skews it towards the coast, but we’re seeing it across the globe, to be honest. Europe and Asia as well. It just goes to show the fact that the average deal value is about $10 million, which already hints that most of the transactions are talent- or technology-focused. I personally believe it’s a global phenomenon that slightly skews towards probably the West coast of the US.
Clay: I’ve spoken to a few companies that had been approached [00:45:30] about an acquihire. Something that stuck out is a consistent theme, is a desire from the acquiring company or the potentially acquiring company to have folks move to the coast. So, it seems like another HR strategy.
Ricky: Yeah exactly.
Clay: One of the things that I heard a lot about in 2016–2017 was this idea that there would be a lot of [00:46:00] consolidation among exchanges in the United States. Most trading activity happens through the New York Stock Exchange or the NASDAQ. There’s really a handful of core exchanges. The thesis was that this would continue or that this would be replicated in the crypto space and that this proliferation of exchanges would stop.
What I’ve seen and just empirically looking at the data [00:46:30] is that the number of exchanges has only grown. There’s security token exchanges, there’s exchanges for non-fungibles, domains on the handshake network, crypto kitties. There’s all kinds of various contracts in DeFi products with their own niche exchanges.
It seems companies like Coinbase with deep pockets are not going out and buying a bunch of Fiat on-ramps all over the world. Do you have any insight into why more acquisitions of exchanges [00:47:00] by other exchanges? Why that hasn’t happened whether it hasn’t been consolidation?
Ricky: That’s a very good question/insight, but I think it partially has to do with the fact that if you just take a look at the volumes, it’s probably the top 10 exchanges that just trade most of the volume.
We haven’t gotten to this moment where these top 10 exchanges are really encroaching each other’s territory. [00:47:30] That’s why they can still focus on just trying to just conduct M&A on the talent side or in niche products that they have started to find very good traction. For example, Coinbase has custody business. It’s really taken off in the past 12 months. Hence, they thought it was a good idea just to acquire Xapo’s custody business. That’s an acquisition that you haven’t seen from a Kraken or a Binance.
Clay: I think the [00:48:00] Xapo thing was interesting. My understanding of that deal is that Coinbase just acquired the institutional custody customers of Xapo, so all the large accounts.
Ricky: Yeah it’s a subset that they bought not the whole Xapo business.
Clay: Right and it was just a customer acquisition. They didn’t buy any of the technology or the infrastructure or any of that. They just moved those funds over to Coinbase and grew their business significantly. It’s interesting. It’s more around customer acquisition than around [00:48:30] directly acquiring liquidity and aggregating that.
Ricky: I found that particular transaction very very interesting because I come from an institutional trading background and that was very normal. Banks or funds would consistently just sell books or customers to other banks or funds, depending on their internal strategy or risk limits. The Coinbase-Xapo custody deal is the closest thing I’ve seen to that dynamic, which is [00:49:00] very normal in traditional financial markets.
Clay: Something that stuck out to me once you start asking a question, you start realizing all the various categories and subsets that exist come within the larger question. One of the things that stood out to me was you mentioned that TRON bought BitTorrent and my first instinct was “Wait that’s not crypto M&A,” in the sense that the target company, is it really in the blockchain space, but I guess by another measure [00:49:30] it definitely is because it’s within the crypto industry.
Do you have these stats on what percentage of deals are a crypto company acquiring another crypto company, a crypto company acquiring a non-crypto company? Maybe for regulatory compliance or something like that, and then the percentage of non-crypto companies acquiring crypto companies. It’s interesting which direction these things are flowing in.
Ricky: We count 53 deals. The 53 deals represent about [00:50:00] $400 million in deal value, in which it was a non-crypto company acquiring a crypto company. The other way around where it was a crypto company acquiring a non-crypto company like the TRON BitTorrent case, I can filter that out. It’s just that I don’t have the stats on hand, but it definitely goes both ways.
The non-crypto acquiring crypto that’s like Facebook buying Chainspace. And there’s a handful of especially in Asia, there’s a bunch of [00:50:30] the conglomerates that at one point bought crypto startups to see if they could use the tech in their eCommerce business lines.
Clay: In terms of data sources, did you source all of this data yourself or were there some databases you used as starting points? If so, what data sources were used?
Ricky: This was mainly Twitter and literally just parsing and scraping [00:51:00] things such as PR Newswire, just in big news outlets to look for crypto M&A. Going from that, just go through a manual review and checking in with some of the players involved, to make sure that the accuracy of the data was good enough for a study like this.
We’ve seen some of the data and reports used by the traditional financial data providers [00:51:30] such as PitchBook, et cetera, but we were thinking that definitely from a crypto angle. there was just not enough. It didn’t say anything about why the transaction took place again and some of the rationales, whether it’s strategic or financial. We quickly abandoned that idea and just went the full manual way. That’s also why it took us more than a year to really come to this point where [00:52:00] this is not enough data and of high enough that we want to pull the insights now.
Clay: Another question I had is just around TokenData as a business. How big is your team?
Ricky: We’re with three right now. One in SF, one in London, and one just working remote less distributed. We’re pretty lean. We started two years ago just before the whole token ICO craze took off. Now, we’ve really [00:52:30] focused on just providing data-driven research and due diligence projects for many funds or some of the projects in this space. It’s definitely been good to get a report this out. We’re doing a follow-up survey with some industry execs and some VCs in the space to get further insights. That’s the trajectory that we’re on right now.
Clay: With three full-time people (if you don’t mind me asking), I don’t see any ads on your website and I don’t even know how I would [00:53:00] give you guys money if I wanted to. I don’t even see maybe a donation button. Does most of your revenue come from custom research? How do you guys drive revenue?
Ricky: Most of our revenue comes from custom research, due diligence projects, custom data requests, et cetera. We did contemplate putting a paywall on there for research or charging people to really just download our [00:53:30] basic TokenData, but we didn’t want to go that way. We come from the finance world and we know how difficult it is to get solid research and data for anything that has to deal with assets, so we want to give back to the crypto space. We could have put a paywall on the M&A report but decided not to do it because this just helps the whole space move forward.
Clay: I’d like to end [00:54:00] by asking about your predictions for 2020. Are there any specific deals that you foresee happening or do you have any categorical predictions about M&A activity in 2020 relative to 2019, in the types of deals that we might see? What do you envision the future looking like?
Ricky: I’m just glad that you’re not asking a price prediction because clearly I’ll just burn myself. [00:54:30]
Clay: What’s the price of Bitcoin going to be in a year? Just kidding.
Ricky: I’ll just burn myself. Let me just make a statement here. There’s going to be more M&A activity in 2020 than 2019 because we saw how resilient strategic M&A has been far. It’s just a small drop compared to 2018.
I’m hearing some buzz in signs behind the scenes that there is there are a lot of acquihires going on and that has to do [00:55:00] with the fact that a lot of the smaller, whether it’s ICO-funded teams or smaller development teams are either running out of money or they’re they’ve been developing something for 2–3 years and it doesn’t have the user base at the industry envisioned.
You have two options. You’re either going to fold or you’re just going to join a competitor or bigger crypto company that can use your talent. I’m just expecting [00:55:30] more and more acquihires or smaller technology-focused deals to take place and especially in the first half of 2020.
When it comes down to the big transactions, the big tickets, are we going to see multiple nine-figure deals? I don’t think so, but I do think that there will be one $500 million-plus M&A deal go through. That could be the first one in the [00:56:00] exchange consolidation space. I don’t think that’s going to happen in the US. That’s probably going to happen in Asia.
Clay: Interesting. And if you have any behind the scenes insight that you can share, what do you think is happening with Circle? I mean they acquired Poloniex and then they sold it. They had one of the highest volume OTC desks that’s been sold. All they have left really is [00:56:30] SeedInvest and USDC. I can’t imagine USDC is a huge driver of profit. What’s going on with Circle? Are they just selling off pieces of the business and lines of business one by one and then they’re just going to dissolve? Or is something else going on?
Ricky: The official line after the announcement that Kraken would acquire the trading desk was that Circle will focus on USDC. USDC right now does not have [00:57:00] a big market cap or a lot of flow happening. It’s as much as the black box to me right now as it is to you, to be honest.
It does show that even the bigger players aren’t shy of just taking their losses because clearly, the Poloniex deal didn’t pan out the way wish it had, and especially in this market environment which a lot of people are not calling it crypto winter anymore because the prices aren’t as low as they were [00:57:30] 12 months ago, but from a deal and funding perspective, there’s actually not a lot of funding happening right now. So, even the bigger players have to have to make moves.
Clay: Well that concludes my conversation with Ricky Tan from TokenData. I hope you enjoyed it. Before you go, I want to invite you to subscribe to our newsletter [00:58:00] called Popular Crypto. With the Popular Crypto newsletter, we don’t cover token hype or announcements of announcements. Instead, the Popular Crypto Newsletter focuses on the mainstream products and services, taking crypto to the masses. To subscribe to the Popular Crypto Newsletter, go to popularcrypto.news, enter your email address and subscribe. Again that’s popularcrypto.news
All right. That wraps up things for this week. Stay tuned for next week’s episode. Until then take care.
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