ICO Mergers: A Market for Lemons

The original version of this article appeared in my daily newsletter, CryptoAM, where I provide market updates, new analysis and my general thoughts on crypto.


One thing that’s always fascinated me about crypto are the massive fundraises for similar products. We’ve seen plenty of cryptocurrencies launched that focus on identification, supply chain, payments, credit cards, etc. The list goes on, with multiple projects trying to solve the same issues.

One would expect an industry in winter to experience significant M&A activity. This begs the question, why hasn’t it happened in cryptocurrency yet?

Well, the first answer to that question is it already has been happening, but mainly just by cryptocurrency focused companies, and not ICOs themselves. For example, Coinbase has been on a buying spree, spending hundreds of millions of dollars on acquisitions over the past few months. Circlepay bought Poloniex for $400m, and BitGo bought Kingdom Trust for an undisclosed sum.

There have also been ICOs that have acquired traditional companies that align with their mission. For example, Tron recently acquired BitTorrent, and MetalPay acquired Crumbs (a crypto version of Acorns).

I’m of the opinion these types of acquisitions will likely become more prevalent as time goes on. Why? Three reasons, stolen straight from Spencer Bogart:

  1. There are many projects with huge balance sheets, due to massive price appreciation and fundraises over the past year.
  2. Second, most do not have solid infrastructure. Spencer refers to these as CFBLs (Cash Flush, Business Light)
  3. Third, news affects the cryptocurrency markets. If you announce an acquisition, your own personal token may appreciate 5–10% in value, which would cover the cost of the actual acquisition…making it essentially free.

Puzzlingly, what hasn’t been common is the merging or acquisition of ICOs by other ICOs, despite what seem on the surface like obvious synergies. There are plenty of ICOs that are tackling “crypto-loans”, and they’re not doing so well as the bear market takes its toll. In the traditional world, it would seem prudent to consider a merger. In the crypto world, this is complicated.

Although ICOs may have common interests, the introduction of tokens make it difficult to merge communities and systems. Seeing as tokens are inextricably linked to the value of the platform, it is in neither founders interest to merge, as it would likely require one of them to give up the value of their token.

In the traditional world, one would give up stock for capital. In the crypto world, the incentives might not be there. Many founders truly believe in crypto (as they should), and would be unwilling to part with their chance at riches due to the “coming bull run”. People actually do think this way. The traditional market may offer 30%+ premiums for stock, but that is unlikely to sway your average crypto founder.

The game theory of merging in a tokenized world is much more difficult than merging in the real world. If the company has chance at lasting for >6 months, it’s likely in their best interest to ride it out, not give up their token, and hope for a bull run. It’s only when they are clearly about to fail, that they might be willing to merge, or sell off assets — and at that point who wants to buy them?

In other words, ICO <-> ICO mergers seem to be a market for lemons.

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