Why distressed digital exchanges are ideal takeover targets

Tanzeel Akhtar , 17 Apr 2018 - Bitcoin ExchangeCryptocurrencyHack

Over the years we have witnessed a number of crypto exchanges get hacked and collectively lose billions to cyber thieves. Some close down, while others hobble on with scarred reputations and nervous shareholders. Curiously, this makes them perfect targets for acquisition. 

Coincheck, the cryptocurrency exchange that lost about $500 million of XEM (the NEM token) to hackers in January was acquired by Japanese financial service company Monex Group earlier this month. Poloniex, another breached exchange, was taken over by digital payments company Circle in February.

The most notorious exchange breach was that of Mt Gox which was forced to shut down after having lost around 850,000 Bitcoins in February 2014. The second-biggest hack was the exchange Bitfinex which resulted in an estimated 120,000 bitcoin (valued at $72 million at the time) being stolen. Bitfinex is still running albeit with ongoing controversy, accused of being involved with money laundering in Poland.

Nearly all of these distressed exchanges continue to operate and some have become takeover targets. So what makes these assets attractive to acquire, and do they present an opportunity for large companies to diversify into cryptocurrencies on the cheap?

Word on the Street

Charles Thorngren, CEO of Noble Bitcoin, a provider of traditional and IRA-approved cryptocurrency assets says he has been watching and talking about Wall Street's move into the cryptocurrency sector for some time, and an acquisition is one of the strongest moves Wall Street can make into the space.

“M&A is the lifeblood of Wall Street,” he says. “When the likes of Goldman Sachs buy out an exchange they are looking at two things: the fees exchanges charge and the positioning of themselves in assets that have the potential to skyrocket in value. The recent pullbacks are the primer that is needed for financial firms to step up and take management control.”

Eyal Oster, president of Momentum, a customer relationship blockchain project, says in an extremely volatile crypto market the exchanges, as market makers, are the ones who profit regardless of which direction the prices go.

Exchanges redeeming their reputation

Another reason distressed exchanges appear as great takeover candidates after a hack is because of the reputational damage done to the incumbent management team. In the case of Coincheck, for example, its CEO admitted to astounding security lapses — revealing that the half-a-billion dollars worth of stolen XEM was sitting in a hot wallet at the time it was lifted — in addition to admitting that the hot wallet in question wasn’t even using multi-signature authentication.

Such incompetence leaves shareholders and customers alike looking for the reassurance that new management might bring, along with a strong brand name (in the case of Monex, for example) to win users back.

Oster adds: “There are examples of exchanges which have been hacked in the past but recovered and are very popular now and therefore it’s only natural that even a distressed exchange will become an acquisition target as they bring in knowledge, a customer base and a certain reputation which can be recovered if a highly reputable player steps in.”

Takeovers and acquisitions are the fastest way to get in the game and prepare a corporate strategy for the inevitable arrival of crypto and asset-backed token regulation.

Low acquisition cost in a down market

It is common for companies with good liquidity to ramp up acquisitions during an industry downturn.

There is also a noted ‘blockchain effect’ happening: when public companies outside the industry announce a blockchain project, takeover or ICO and, whether purposely or not, their share price subsequently soars.

The most pronounced example of this is the Long Island Ice Tea Corp, whose share price had been on the slide since 2016 until it announced a rebranding to Long Blockchain Corp, after which its share price jumped over 400 percent. A similar phenomenon is happening to listed cannabis companies in Canada pivoting to include blockchain in their name.

When Kodak, the once-mighty leader in photography that has faded into obscurity, announced a KodakCoin for photographers the company share price jumped 60 percent on the news.

So, companies looking to add value to their share price may find the cheapest, easiest way to do so is to acquire an undervalued blockchain company — and bypass having to make the technology themselves.

Coincheck awaits regulator’s review

Currently, Coincheck is one of 16 crypto exchanges being reviewed by the Japanese Financial Services Authority (FSA) for an crypto exchange license. Japan is one of the few countries in the world to have such permits.

Despite the hack and being issued with two business improvement notices this year, Monex must be confident that a license will be granted to Coincheck and it won't be going the way of Binance, which is relocating to Malta after being warned by the FSA that it didn't have a license to operate.

Being under the ownership of a listed financial firm like Monex will certainly increase Coincheck's chance of being granted a license to keep operating in the country and quite possibly set a precedent for more exchange takeovers by public companies.