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Can you Fund M&A With Cryptocurrency?

Posted on July 23, 2021 By

What is Cryptocurrency?

It seems like everyone is talking about it, but what exactly is cryptocurrency, or crypto? It is a digital payment method that is exchanged online to pay for goods and services. Crypto uses blockchain, which is a highly secure, ledger technology that is spread between multiple computer systems that manage and record transactions. As of now, bitcoin (BTC) is the most popular digital token network, followed by ethereum (ETH). They are both decentralized, meaning that they are not issued or regulated by a central banking authority. In 2020, Bitcoin beat the investment returns of gold and the S&P 500.

Some companies issue their own currencies (known as tokens) that can be traded for the good or service that they offer, sort of like carwash tokens or casino chips. “Real” currency must be used to purchase the cryptocurrency. There are currently more than 6,700 different cryptocurrencies being publicly traded, and their popularity continues to grow. As of April 2021, the total value of all cryptocurrencies was more than $2.2 trillion, and the total value of all bitcoins was around $1.2 trillion.

There are several reasons for the rising support for crypto. Many see it as the money of the future and are rushing to purchase it now, before it becomes more valuable and more expensive. Many people also prefer how central banks are cut out of the system so they cannot impact the value of crypto through inflation. There is also great support for its blockchain technology because it offers more security than traditional payment systems. Even amid this growing support, most investors view cryptocurrency investing as speculation. Because cryptocurrencies do not generate cash flow, someone must pay more for the currency than you did in order for you to make a profit.

Crypto M&A

In 2020, mergers and acquisitions in the cryptocurrency sector more than doubled to value a whopping $1.1 billion. The year before, the average deal size was $19.2 million. Yet, in 2020, it rose to $52.7 million. Most of this activity occurred in Europe and Asia, as these regions are more embracing of the technology.

2021 is already on pace to set all new records in this space, thanks to the interest of large investors, institutional players, and cash-laden crypto platforms, and due to the rising popularity of non-fungible tokens (NFTs), decentralized finance (DeFi), central bank digital currencies (CBDCs), and stablecoins.

DeFi is a compelling thread in the crypto space. Developers are rushing to use blockchain to disrupt traditional financial intermediaries in areas like microloans and automated liquidity. In November of 2020, PayPal Holdings Inc. dove into crypto offerings, shaking up this e-commerce space. Experts predict that in 2021, other digital giants such as Facebook and Square will set the pace to broaden this sector.

Another area poised for growth is crypto asset management. Grayscale Investments has more than $10 billion in trust fund assets under management. That is up from $1 billion in 2018. Blackrock, Inc., Fidelity Investments, and Goldman Sachs are all showing interest in this space. Goldman Sachs has a venture investment in the crypto custodian firm BitGo.

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Can You Fund M&A With Bitcoin?

M&A transactions using bitcoin have not been the most popular, but have happened and appear to be on the rise. Many deals have been done with other bitcoin-related firms. In 2019, seven out of the top ten transactions were in the sector of mining and crypto exchange. One reason could be that it is rather inconvenient to acquire and liquidate bitcoin, creating a barrier to those outside the crypto world. Even so, 2020 saw more than double the total value of M&A deals funded by crypto from 2019, which could be in part due to the pandemic and more people spending time at home and online. The number of these deals is expected to increase in 2021, as the crypto market is expanding and more investors appear to be showing more interest in the space.

Another reason that bitcoin M&A deals have not been common is likely the lack of trust in bitcoin’s fluctuating price stability, especially for high-profile transactions, because the bigger the deal, the riskier it is. Over the past five years, Bitcoin prices have fluctuated between anywhere from $400 to $60,000, in some cases even plummeting as much as 50% in one day. This could seriously impact the value of an M&A deal. Government-backed currencies are considered to be more stable and more regulated.

Using crypto in M&A could give both parties a certain level of flexibility in the sale price. A seller could lower the asking price if the payment is made in bitcoin, hoping that its value will increase in the future—a pretty risky venture. It could be recommended that the use of cryptocurrency for a merger or acquisition would require a type of hedge or structured collar against it in case a huge devaluation would occur.

You may have also heard about the growing popularity of smart contracts. A smart contract is like a written contract in the way that it outlines each party’s obligations. But in a smart contract, those obligations are written in computer code and blockchain is used to self-execute, eliminating the need for additional confirmation to wire funds and allowing parties to codify the closing conditions. Each party indicates its satisfaction with each closing condition unilaterally and once all conditions are met, the smart contract self-executes and immediately wires funds to the receiving parties.

There are also potential tax issues due to the unregulated environment of crypto. The IRS isn’t one to sit back and let taxes go unaccounted for. Cryptocurrency also comes with money laundering concerns. In 2014, Canada amended its anti-money-laundering laws to cover digital currencies.

For all of these reasons, using crypto to fund M&A deals comes with its fair share of risks. While its popularity will likely continue to grow, traditional currencies remain a more reliable option and M&A transactions still benefit greatly from a human touch.

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Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $7B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 14 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.


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