In the debris-strewn land of virtual currencies, cash is king.
A blowout in the cryptocurrency market led to a wave of layoffs, punished valuations and drove some companies into bankruptcy. Now the companies that still have capital are preparing for the purchase.
“This is a very ripe scenario for some M&A,” said Jalak Jobanputra, the founder and managing partner of crypto-focused venture capital fund Future Perfect Ventures.
Last week, crypto-lender Nexo agreed to acquire a Singapore-based peer called Vauld. While terms of the deal were not disclosed — vauld had raised $27 million since its founding in 2018, according to research firm PitchBook — Nexo framed the deal as one that included a stable company with means to help a sector of the foundation.
“Some companies are in better shape and have been preparing for this,” said Antoni Trenchev, co-founder and managing partner of Nexo. “Down cycles are part of the business cycle.” Nexo is working with two Wall Street banks, Trenchev said, and is in talks with other companies about possible deals. The trickier part, he said, is figuring out which companies can be saved.
While he did not disclose names or potential sale prices, he did say that sector valuations were down significantly.
Another active buyer has been Sam Bankman-Fried. In June, the 30-year-old billionaire’s crypto exchange FTX reached a deal with lender BlockFi that included an option to buy the company for up to $240 million. In the same month, his trading company Alameda Research acquired a minority stake in now-bankrupt Voyager Digital.
Just seven months ago, the crypto industry was riding a wave of momentum. The value of the entire industry had reached a record $3 trillion. Companies were raising record amounts of capital and competition among investors was fierce. Crypto was becoming part of the zeitgeist as Coinbase, FTX and Crypto.com ran Super Bowl ads.
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However, like the dot-com era, the timing of these Super Bowl ads marked a peak. The price of bitcoin fell steadily during the first four months of the year. Trading volumes fell sharply, cutting into revenue for exchanges like Coinbase, which posted a surprisingly wide loss in the first quarter. Layoff notices began to proliferate.
Things took a turn for the worse in early May. The collapse of two linked cryptocurrencies called TerraUSD and Luna wiped out a combined $60 billion in value. This collapse caused a chain reaction of failures throughout the sector.
The remaining companies have seen their valuations sink. Publicly traded companies have fallen from 50% to more than 90%. Voyager’s stock fell about 96% before it filed for bankruptcy. The same dynamic is likely to play out for private companies as market insiders say valuations are on the downside. For example, BlockFi boasted a $5 billion valuation just six months ago.
With valuations down so sharply, companies with money in the bank will run. Tagus Capital, a UK crypto venture capital firm, is looking to deploy $100 million in distressed crypto assets, said Ilan Solot, a partner at the firm.
He said the team is still figuring out which companies to participate in, but that asset revaluations, in part due to issues facing Celsius and Three Arrows Capital, have created opportunities to buy distressed assets.
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Solot said they mainly focus on investing in cryptocurrency infrastructure companies, such as cryptocurrency exchanges, as well as wallet and payment technology companies.
Still, mainstream dealmaking in the crypto sector has been slow to date. The number of M&A deals and venture financing declined in the second quarter as conditions deteriorated. In April, there were 23 M&A deals, according to PitchBook. In May there were 20. In June, there were 17.
Venture capital was also reduced. There were 249 deals in April, according to PitchBook. It fell to 180 in May and 157 in June.
The fallout is likely to drive away weaker startups as well as venture capitalists who jumped in trying to ride the heat wave, Jobanputra said. Many of the weaker cryptocurrency-focused funds will “quietly disappear,” he added.
“There’s been a lot of noise in the market the last couple of years,” he said.
This leaves the field more open for survivors. Binance, the largest cryptocurrency exchange by trading volume, is looking at 50 to 100 deals of various sizes, some investments and some acquisitions, founder and CEO Changpeng Zhao told Yahoo Finance.
Zhao was unavailable for comment.
This would be a huge boost for the company. Its venture arm, Binance Labs, has made 26 investments so far this year, according to PitchBook. Its largest was a $200 million investment in Aptos Labs, which publishes blockchain-based software for developers. Its most recent was a $3 million investment in AI software maker Magic Square in July.
The crypto crackdown is a needed wake-up call for an industry that had become too heady, said Chris Lehane, chief strategy officer at venture fund Haun Ventures, which raised $1.5 billion in March and focuses on in the first state companies. Ideas that were little more than a drawing on a cocktail napkin were funded, he said.
“We had almost a decade of free money,” he said. “Now people will have to show that they have real ideas.”
– Caitlin Ostroff contributed to this article.
Write to Paul Vigna at paul.vigna@wsj.com
This article was published by Dow Jones Newswires, a service of the Dow Jones Group
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