Plunging cryptocurrency prices are beginning to upset the plans of companies trading Bitcoin and related fields, amplifying the impact of an already brutal market decline.
Heading into 2022, crypto deal closing has been hot as companies seek to carve out positions in an evolving industry. So far this year, there have been 42 announced acquisitions of crypto companies, a pace that Dealogic says would surpass last year’s 60 deals.
But it’s been nearly two months since the last deal was announced, a time that coincides with a tumble in digital assets and suggests some companies could struggle to reach or complete mergers until markets clear . Firms that may be caught in an uncomfortable limbo include Mike Novogratz’s crypto merchant bank, Galaxy Digital Holdings Ltd., which agreed in spring 2021 to buy crypto custody specialist BitGo in a deal yet to be finalized.
Some promoters have characterized bitcoin and related assets as resistant to inflation and generally uncorrelated to other risky markets, such as for stocks and some bonds. But the breadth of the market crisis in 2022 skewered those claims, adding to the fallout of the Federal Reserve’s campaign to curb inflation by raising short-term interest rates. Bitcoin is down two-thirds from its peak last year, compared to a 22% drop in the S&P 500 and an 86% drop in crypto exchange Coinbase Global Inc.
For now, some investors remain optimistic in crypto-related sectors, claiming that the market is inherently volatile and that the companies that offer the most value over the long term may survive the current market shakeout. Some say they are bracing for what they expect to be a brisk period of value investing once the meltdown pauses.
“I expect mergers and acquisitions to increase as companies with strong balance sheets seek to acquire crypto companies that have valuable assets or intellectual property and weaker balance sheets,” said Kevin Kang, who serves as the helm of BKCoin Capital LP, a New York crypto hedge fund, is helping .
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Six previously announced deals are waiting to close, Dealogic says, and some investors are wondering if they’ll all make it to the finish line. In May 2021, for example, Mr. Novogratz’s Galaxy Digital agreed to buy crypto custody specialist BitGo for $265 million in cash along with Galaxy stock.
If the deal closes, the deal promises to make Galaxy a key player in the competition to attract institutional and retail investors. But Galaxy has already delayed the deal and increased the shares promised to BitGo holders.
The transaction is conditional on Galaxy listing its shares on the Nasdaq exchange. However, according to people close to it, Galaxy is still in talks with the Securities and Exchange Commission for approval of its plan to reorganize as a Delaware-based company and then list on the Nasdaq.
For its part, Galaxy has expressed confidence in the transaction going through.
“We hope for the best and will continue to work with the SEC,” Mr. Novogratz said on a conference call with shareholders in late March.
Galaxy and BitGo declined to comment.
But some investors say turmoil in the crypto world could make it harder for the deal and others.
“They’ve pushed it back a few times now, and the terms of the deal say it has to close by the end of 2022,” said Eric Jackson, founder of EMJ Capital Ltd., a Toronto-based hedge fund.
Mr. Jackson is a BitGo fan and says Galaxy stock is attractive, especially if the acquisition goes through. But he notes that Galaxy’s shares, which are down about 67% over the past year, are worth about $2 billion, not much more than BitGo’s $1.2 billion worth in the transaction.
“One would think that if BitGo is still valued close to $1.2 billion and people expect the deal to go through, Galaxy would get credit from investors for its market cap,” he says.
The deal comes as crypto-related firms like Galaxy seek to establish themselves as established players capable of making money no matter what happens to crypto prices, just as Wall Street firms profit in all types of markets. Galaxy sells crypto mutual funds, transacts trades for other major investors, and advises digital asset companies on acquisitions.
“Crypto firms are ‘down rounding’ and shedding their workforce, this will lead to interesting M&A opportunities and industry consolidation,” said Mr. Kang of BKCoin Capital.
Write to Gregory Zuckerman at [email protected]
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