By Michael Chang, Managing Director, Strategic Advisory Group, Wachsman
It’s estimated that on or around May 11, 2020, the Bitcoin protocol will undergo a halving event that will reduce the amount of new bitcoin created by each new block from 12.5 bitcoin to 6.25 bitcoin. While halving events like this have happened before, we predict that the period leading to the 2020 event will serve as a key milestone in the future trajectory of digital assets (i.e., cryptocurrency); a pivotal moment where traditional business will be faced with the tantalizing proposition of a maturing blockchain technology stack combined with increasing rates for consumer adoption.
With less than two years remaining and 84% of companies already actively considering blockchain-centered initiatives, leading digital asset companies and traditional enterprises will be in a race to grab as much “beachfront property” as possible in this new and growing sector.
A key tool in their arsenal will be mergers and acquisitions (M&A). The digital asset industry is no stranger to M&A. This year alone has seen a number of high-profile acquisitions made by leading organizations looking to expand their platforms. Recently, cryptographic ledger systems startup Chain, Inc. was acquired by Lightyear Corp., the commercial arm of Stellar Development Foundation, for an estimated $500 million USD.
This transaction follows a number of high profile acquisitions made by industry leaders like Binance, Coinbase, and Circle in 2018. Digital asset companies joining the rapidly-growing M&A trend all have one common denominator: They are relatively young companies aggressively acquiring targets at high traditional valuations. It’s a perplexing scenario.
Why are leading digital asset companies paying up when they already have a commanding lead in the market? It’s not because they are competing with each other; Binance, Coinbase, and Circle are competing against the likes of the CME, Goldman Sachs, and Citigroup.
To date, traditional enterprise have only dipped their toes in the water on digital assets and much of this has centered around experimentation. However, traditional enterprise is starting to accelerate their efforts. In July, stock market trading app Robinhood announced that it would begin accepting both Bitcoin Cash and Litecoin following the success of Robinhood Crypto. Decisions like this and others have increased pressure on leading digital asset exchanges, such as Coinbase, to expand upon their service offerings.
Announcements like these have sent a clear signal to digital asset companies that traditional enterprise is paying attention, and is not only considering, but accelerating their entry into the space. It’s a promising sign for mainstream integration, as the decisions of large corporations will no doubt serve as a catalyst for greater mainstream blockchain adoption. Heightened corporate interest will lead to heightened industry investment, and a plethora of M&A deals will start to splash across the headers of business publications all around the world.
Soon, we believe that many of these companies will begin acquiring both established and emerging digital asset companies in an effort to provide scaled, best-in-class service offerings to users, creating products that have proven mainstream potential. We’ve already begun to see these initiatives materialize. In December 2017, CME Group, a leading derivatives marketplace, announced that it would be partnering with trading platform Crypto Facilities to create a new bitcoin futures product, attracting financial institutions to the world of digital asset trading.
Moreover, Amazon Web Services (AWS) has spent the past year announcing a string of partnerships with emerging blockchain projects, including Sawtooth and Corda R3, in an attempt to offer distributed ledger products straight from its marketplace — with future integrations expected in the near term.
Potentially, we may see companies like Facebook utilizing a blockchain-powered web browser like Brave, or digital asset-focused social media platform like Steemit, to further expand its platform. Once traditional enterprise enters the space, the potential integrations are limitless.
It will be a challenge for digital asset companies to combat the seemingly limitless resources that many of these corporations possess. If digital asset companies are going to remain competitive, they will need to effectively prepare for this new landscape. For years, these companies have been able to operate in a largely uncontested market. This is no longer the case.
As traditional enterprises lean further into this fast-growing and evolving industry, the need to understand and capitalize on key trends will become more than a best practice, it will become a prerequisite for success.
While the prospect of traditional enterprise conducting rapid M&A in the crypto space may seem daunting for any emerging startup, cryptocurrency companies should not run in fear of centralization permeating the industry. It’s likely that in the lead up to 2020, big business will begin acquiring cryptocurrency companies in an effort to expand their platforms.
However, with thorough due diligence, careful planning, and clearly-defined strategic plan of action, emerging cryptocurrency companies will be able to adjust to this new reality, and continue to create groundbreaking platforms that propel the industry forward.