The recent troubles in the world of cryptocurrency have raised questions about the viability of the entire asset class. The collapse of FTX in November and runs on crypto-friendly banks in March have caused concerns among investors. However, a closer look at the long-term performance of blockchain companies and crypto miners shows that these doubts may be unfounded. Financial investors have remained active, and M&A activity is still strong in the crypto space. In this article, we will focus on two engines of the crypto world: blockchain tech companies and exchanges, and crypto miners.
Both sectors have had a difficult year, with their market caps plummeting relative to the Nasdaq Composite Index. However, it is important to put this into perspective. Investors are now assigning a similar revenue multiple to these two crypto-related sectors and the Nasdaq. This is tracked using enterprise value (EV) divided by revenue. The mining group, in particular, has seen a massive rebound in this metric since the beginning of the year, coinciding with bitcoin’s large rally. If we look at a wider time horizon, the mining group still outperforms the Nasdaq between April 2020 and April 2023, winning 90% to 63%. The blockchain group is down 12%.
Crypto miners benefitted from a huge bubble in the first half of 2021, with valuations trading between 30x and 70 EV/revenue. From early 2022 to mid-2022, these extreme valuations normalized and converged around 3.5x EV/revenue. The blockchain group closely tracks the Nasdaq, though with less volatility.
Despite the recent crisis, there are still a number of very active financial investors in the crypto space. In 2022, there were 2,541 venture capital (VC) investments totalling $26.2 billion in crypto or blockchain companies. Some highlights include Celestia raising $53 million in a Series B round, Matter Labs raising $200 million in a Series B, and Fenix Games completing early-stage rounds and raising $150 million. As of the fourth quarter of 2022, the top 10 VC-backed companies have raised approximately $8.45 billion during their lifespan.
Coinbase topped the ranking of the most active financial investors in crypto in the first quarter of 2023 with 340 investments, while NGC Ventures was in second position with 258 investments. The top 10 financial investors are based in the U.S. (six of them), China (three), and Singapore (one). Notable M&A deals closed in the fourth quarter include Gleec BTC Exchange acquiring Blocktane for $1.5 billion, Binance buying TokyoCrypto for $225 million, and Bankless purchasing Earnifi for $150 million.
The valuation of crypto-related companies has converged with the rest of tech, indicating that the digital-asset industry is maturing. The recent crisis has pruned out non-viable players, and investors are adopting a less speculative stance on this asset class. As crypto mining exemplifies, there may be room for certain subsectors of crypto to deliver superior performance compared with peers. Of particular interest are the blockchain security platforms – such as Fireblocks, Taurus, or Copper – that offer solutions to protect digital assets like crypto. Valuations will be supported by specialized private investors and M&A activity driven by consolidation plays at the international level, either by geographic or technology consolidation.
In conclusion, despite recent troubles in the crypto space, the industry remains dynamic and resilient. The convergence of valuations with the rest of tech demonstrates that the sector is maturing. Investors are adopting a less speculative stance, and there may be opportunities for certain subsectors of crypto to deliver superior performance. The blockchain security platforms, in particular, are of interest and may see increased support from specialized private investors and M&A activity.
