A service of

Crypto Consolidation: Uptick in M&A expected in 2023

Negative headlines in the cryptocurrency space, led by FTX’s recent implosion, will tarnish trust in the industry and slow down investment. But the news is unlikely to cool M&A activity.

To the contrary, advisors and executives in the space expect a rebound in acquisitions as companies face depressed valuations and a difficult capital-raising environment.

“Companies have to transact right now,” said Adam Sullivan, managing director at XMS Capital Partners. “Companies are running out of cash.”

Brian Korn, partner at Manatt Phelps & Phillips, echoed that sentiment. He has not seen a slowdown of clients or prospective clients looking at their capital formation, token issuance or M&A activity. By contrast, investors are showing greater caution and exercising more due diligence, requesting terms that allow for greater transparency around deposited funds.

Dealogic data shows the number of deals in North America’s crypto space has fallen at a steady clip this year, mirroring Bitcoin’s swoon. By contrast, deal value has seesawed back-and-forth, yet has remained historically robust.

Bankruptcy contagion

Companies that struggle to raise capital will make easy acquisition targets, the advisors said. Software code and other intellectual property may be sold off for parts if the company behind the protocol does not have lasting value, added Korn.

Executives at eToro Group and CoinFlip have spoken recently about looking to take advantage of buying opportunities.

FTX’s collapse and subsequent bankruptcy filing in November has “wide-reaching consequences” for the sector, said Sullivan. Not only has it hurt crypto’s public image and damaged people’s financial standing, but it has also eroded the faith of employees who have risked their careers to jump into the space.

The contagion spread far beyond FTX to almost every lender in the industry and several large funds.

Crypto lending platform BlockFi filed for bankruptcy 28 November, crypto mining data center operator Compute North filed for bankruptcy in September, and lender Celsius Network filed for bankruptcy in July.

More are likely coming.

Shares of Core Scientific [NASDAQ:CORZ], a crypto yield-earning platform valued at USD 4bn when it went public via a special-purpose acquisition company in summer 2021, are now trading at just 13 cents.

Even before FTX filed for bankruptcy, London-based crypto miner Argo Blockchain [LON:ARB; NASDAQ:ARBK] announced it may collapse unless it can raise new capital. Its shares are trading at around 69 cents after topping USD 20 in late 2021.

Sullivan expects a pullback in investment from large funds for a long period of time and perhaps more hesitancy for new entrants to the crypto space, but remains bullish on long-term growth.

Runway to survival

Without a “broad rebound” in prices, Sullivan said he does not expect any individual segment within crypto to see an increase in investment next year.

The price of Bitcoin has sat between USD 16,000 and USD 17,000 for much of the last month, down from its all-time high of USD 68,789 last November.

“We’ve told our clients that they need to prepare for 18 to 24 months of depressed lower-for-longer crypto prices,” Sullivan said. “[Companies] need to have the runway to survive that time period.”