Crypto M&A HeatMap — Derivatives front-running the New Bull Run
2020 has seen a major surge in product offerings catering to sophisticated and institutional investors in the crypto space. Exchanges around the world have recognised the importance of services such as institutional-grade custody, research & data analytics, prime brokerage and derivatives to institutional investors.
Derivatives specifically satisfy two of the core needs of institutional investors — increased profitability and risk management capabilities, and have therefore received a lot of interest. Also the increasing breadth of available financial products allows more sophisticated strategies to be applied to the crypto space that have been derived from and tested many years in traditional markets. Most notably, derivative exchanges have received the largest amount of institutional investment since 2014, comprising approximately 45% of total sector investment.
Blockchain Valley Ventures (BVV) conducted an analysis of top global derivatives exchanges, screening 50+ exchanges and conducting an in-depth analysis on the largest 30 to what concerns their attractiveness to become an acquisition target. Sebastian Markowsky Partner at BVV stated: “The discussions we are having with relevant players in the space make us believe, that the crypto derivatives market is the next key market for M&A. Since we see M&A activity happening at a much faster pace mainly centered around market leaders, we also expect challengers to engage in external growth to keep pace with the top dogs. In the chase for massive volumes and institutional clients derivatives seem to tick all boxes.”
BVV compared all relevant derivatives exchanges looking at technical, commercial, regional and market based characteristics and extrapolate an attractiveness score of certain derivative players versus likely acquirers. There are certain very well fitting M&A pairs we identified and combining this with the pace at which the industry moves, and the sheer size of the derivatives market today and its expected growth near-term, it would be ignorant not to expect heavy consolidation to happen. There are further markets, like crypto data, compliance and prime brokerage as well as the custodial and non-custodial wallet market, which show strong momentum and indicate a possible further consolidation.
The crypto derivatives market is experiencing exponential trading volume growth from USD1.1tr in H12019 to USD4.2tr in H12020, representing an increase of 296%. There is a further 10x opportunity only if extrapolating size ratios in traditional markets without continued growth of the underlying spot market.
It is a 10 versus a 10x growth opportunity.
It is expected that the crypto derivatives market will continue its rapid growth and ultimately overtake the spot market in trading volume, as is the case in the traditional stock market. Market- leading exchanges (Huobi, Binance and OKEx) already experience higher trading volumes in the
futures market compared to spot between 3 and 7 folds. Other key players currently focusing on spot trading for the moment are missing out on the surge in trading volume, such as Coinbase or Bitstamp.
From the top 10 crypto-exchanges, only 2 are missing cryptocurrency derivatives offerings.
Binance, OKEx and Huobi are the market leader in terms of volume in the industry, benefiting from strong synergies between spot and derivatives offering other challengers also want to tap into.
Coinbase and Bitstamp are key players that are yet to enter the market. The activities of Coinbase to acquire and develop the building blocks to attract professional and institutional customers imply that a move into derivatives may be a next step on the agenda. For Bitstamp, which has already a strong positioning with institutional investors, it may just be a logical step to extend offerings into derivatives to attract future and deepend current demand on their clients’ side.
Asia is the main trading hub for derivatives.
Unlike in traditional finance, where most volumes are concentrated in Western economies, crypto derivatives are overwhelmingly traded on exchanges based in Asia. Singapore especially has been chosen by many companies as its operational base due to its reputation in the financial industry and its openness for innovation by regulatory bodies.
We will see a lot more product innovation in the coming months.
We are just at the beginning — the pace of innovation is at an all-time high. With the market continuing to mature, we expect new products based on a new set of underlying assets to be announced in the future. We expect the entire industry to mature massively and institutional grade offerings from top tier jurisdictions experiencing a surge in demand. With increasing sophistication of customers and more complex operations needing further financial tools to manage risks and liquidity, derivatives have a bright future ahead. New innovations will mainly center around difficulty and volatility focused products that will open up totally new opportunities for capturing
For more information, download our Crypto Derivatives M&A Heatmap Report.
Biographies
Sebastian Markowksy
Sebastian Markowsky is a Partner at Blockchain Valley Ventures based in Frankfurt and fully focused on helping entrepreneurs succeed in digital asset fintech and enterprise blockchain software to reach their goals. He has more than 10 years of previous experiences in Investment Banking divisions as Director of GP Bullhound and Senior Associate of Deutsche Bank.
William Mougayar
William Mougayar is a Board Member at BVV. An experienced venture partner and thinker in the digital asset space, William is a recognized thought leader who draws on a wealth of international experience being a recognized author and board member from several different blockchain based companies.
