Are TradFi and Crypto Set for an M&A Explosion?

The worlds of crypto and traditional finance are set to collide, and mergers and acquisitions will play a key role, according to industry watchers. What form the M&A will take and how soon it will come remains to be seen. 

Banks or investment banks will be in the crypto market in a big way, said Eric Risley, a managing partner at Architect Partners, though big acquisitions likely won’t take shape in the near-term.

“It’s probably more like three years than three months,” Risley told Blockworks. “…If you’re looking at it from an investor perspective and you believe crypto assets are an asset class, why wouldn’t a Goldman Sachs or Morgan Stanley be in that business?”

Risley’s comments come a few days after Anthony Scaramucci, founder of SkyBridge Capital, predicted during an interview with Bloomberg that a big bank frustrated by the growth of decentralized finance will buy a crypto firm such as Coinbase.

A SkyBridge spokesperson did not immediately respond to Blockworks’ request for comment.

High valuations

The regulatory questions around crypto and the high valuations of companies in the space will likely inhibit a large traditional bank from making such a large acquisition, especially in the short-term, Risley argued. 

“There’s always a tension with regard to valuation,” Risley said. “If you’re buying a business that has a certain amount of cash flow or revenue, and you have to pay a much higher multiple than what you’re being valued at in the market, is that something you should do? In today’s market, that is an issue.”

Coinbase, which has 68 million users and $180 billion assets on its platform, went public in April. The cryptocurrency exchange reported more than $2.2 billion of revenue in this year’s second quarter.

Jay Biancamano, a managing director at financial services titan State Street, said during a Blockworks webinar last week that if crypto company valuations were as low as they were in 2018, there would be a lot more M&A.  

“The valuations have really gone through the roof,” he explained. “You look at [State Street’s] valuation, we’re close to $40 billion, and then you look at Coinbase’s valuation of $100 billion. Certainly there is an opportunity for Coinbase to move further into our space, but we’re also looking at organically moving into their space.”

Anthony Pompliano, of Pomp Investments, said during the discussion that though five years ago people guessed that Wall Street would buy up all the crypto companies, the incumbent financial players are now “poor” compared to them. 

“My thought process right now is over the next five years many legacy institutions are going to be putting themselves up for sale,” Pompliano said. “They’re going to see innovation is going to disrupt their businesses and they’re basically going to try to extract whatever value they feel like they have left. The natural buyer of those organizations would be the crypto companies.”

Smaller deals are more likely 

An easier step for a company like Goldman Sachs or Morgan Stanley might be to buy a smaller crypto firm like Genesis or Galaxy Digital, Risley added. 

“They’re more focused on institutional investors anyway, which is likely where the banks would want to start,” he said of Genesis and Galaxy. “And they would be more modest in size and valuation.”

Goldman Sachs announced a digital asset strategy in May that included offering bitcoin derivatives and opening a dedicated trading desk for cryptocurrency, and more recently partnered with Galaxy to help meet the increasing demand from institutions.

Invesco, a fund group that manages about $1.5 trillion in assets globally, also recently announced a partnership with Galaxy to create a suite of physically backed digital assets ETFs.

Morgan Stanley has also been moving slowly into the crypto space, filing for bitcoin exposure in various funds. Several of its institutional portfolios hold thousands of shares of the Grayscale Bitcoin Trust (GBTC), filings show. 

Dan Sondhelm, CEO of marketing consulting firm Sondhelm Partners, said “a good proportion” of the asset managers and other financial firms he works with are interested in expanding into the crypto space. A growing number of inbound requests are from boutique crypto managers who want to grow organically, expand to more sophisticated client bases or find a strategic partner who brings stronger sales and marketing capabilities, he noted.

“I believe it’s a mistake for many firms to not stay abreast of the opportunities and challenges,” Sondhelm said. “…Several discussions between firms with sales and marketing and boutiques are currently in the dating phase.”

As financial services incumbents look to build, many will likely opt for smaller deals that add technology and other capabilities, Risley said, much like Mastercard’s recent purchase of crypto intelligence company CipherTrace.

How interested are institutions?

Scaramucci also told Bloomberg that those who say there is institutional adoption in crypto are “not being totally honest.” 

SkyBridge’s CEO said that the new asset class is controlled by what Scaramucci evaluated to be about 10% of the financial services space.

Regulatory uncertainty will act as an inhibitor for certain institutional investors, Risley said, but some are moving toward crypto, and it is still early. 

According to a survey by Fidelity Digital Assets, seven in 10 institutional investors see themselves gaining crypto exposure going forward, and more than 90% of those interested in digital assets expect to have portfolio allocation within five years.

Diogo Monica, co-founder president of Anchorage Digital, told Blockworks in an email that interest is particularly strong from institutional investment consultants, who are getting inquiries from their client base – pensions, endowments and family offices – about how to safely access and hold crypto.

Bobby Zagotta, US CEO at Bitstamp, noted that Bitstamp has seen a 666% growth in institutional investors since opening in the US.

“Because of increased regulation, attention, and broad adoption,” Zagotta said, “we will continue to see everyday investors and financial institutions utilize cryptocurrencies and validate the underlying value proposition of digital assets over the long term.”

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