2017-11-14 The Disruptive Potential of Blockchain

2017 has been a significant year for cryptocurrencies, particularly bitcoin and ethereum. As of October 31st, the price of bitcoin year-to-date has risen more than 400 percent while ethereum has increased more than 3,700 percent. The current market capitalization of bitcoin is about $102 billion, up from $11 billion in October of 2016. Ethereum has a current market capitalization of about $29 billion, compared to less than $1 billion in October of 2016.[1]

Although the skyrocketing prices of certain cryptocurrencies have been drawing the attention of retail and institutional investors, the primary focus should reside on the corresponding technology and infrastructure.

The Evolving Blockchain Landscape

In addition to being used as a store of value, the blockchain technology that underlies these cryptocurrencies holds significant promise to transform a multitude of industries. Blockchain at its core is a distributed ledger of transactions in a peer-to-peer network. Information cannot be erased and online transactions are verifiable without the security or privacy of the parties involved being compromised. Possible uses of blockchain include smart contracts, identity management, copyright protection and licensing of intellectual property, payments, and many others. Smart contracts written on the ethereum blockchain are pre-programmed and self-executing, whereby the buyer and seller write the terms of the contract into the line of code.[2]

Whether it’s finance, healthcare, real estate, or any other sector, the decentralized and transparent nature of blockchain has the potential to change how these markets operate. For instance in the financial sector, immediate settlements using blockchain technology could supplant clearinghouses and other intermediaries. In the healthcare sector, pharmaceutical companies could use the blockchain to prevent prescription abuse and better monitor medicines along the supply chain. In the real estate sector, home ownership information could be stored and shared on the blockchain, leading to more accurate recordkeeping.[3]

Public, private, and hybrid blockchains are being explored by a wide variety of companies. Some of the world’s leading businesses have also been investing resources into developing blockchain solutions. One of the best examples is the Enterprise Ethereum Alliance (EEA), an open-source blockchain initiative than consists of more than 200 members. Notable members include Microsoft, JP Morgan, Mastercard, Cisco, and Intel.[4]

Related M&A and Investment Activity

Blockchain technology has become a driver of merger and acquisition (M&A) activity, due to many of the factors discussed so far. Examples of notable related M&A transactions over the past 18 months include:

– Digital asset exchange Kraken’s acquisitions of Cryptograph, a charting and trading platform; and Glidera, a wallet funding service;

– Digital music streaming service Spotify’s acquisition of Mediachain, a blockchain startup; and

– Online home rental marketplace Airbnb’s acqui-hire of ChangeCoin, a startup that runs a bitcoin-based micropayments service.

There has also been a rise in the number of VC firms focused on blockchain, such as Pantera Capital, Lightspeed Ventures, Khosla Ventures, Blockchain Capital, and Digital Currency Group. Examples of notable related investments over the past 18 months include:[5]

– Coinbase’s $100 million Series D funding led by IVP, with participation from Spark Capital, Greylock Partners, Battery Ventures, Section 32 and Draper Associates (bringing its total disclosed funding to $217 million);

– Circle’s $60 million Series D funding led by IDG Capital Partners, with participation from Breyer Capital and General Catalyst Partners (bringing its total disclosed funding to $136 million); and

– Ripple’s $55 million Series B funding from Standard Chartered, Accenture, SCB Digital Ventures, Santander InnoVentures, the venture arms of CME Group and Seagate Technology, and others (bringing its total disclosed funding to $94 million).

One recent development is that Initial Coin Offerings (ICOs) have been supplanting traditional seed equity funding in some instances. Given the spike in ICO activity, there has also been some concern about the lack of regulations and proliferation of questionable development projects.

Conclusion

When examined in totality, blockchain is still in its early days. According to a survey by Deloitte, 42 percent of executives who claimed some knowledge of blockchain believe it will disrupt their industry. 55 percent said their company would be at a competitive disadvantage if they failed to adopt blockchain technology.[6] Despite the dramatic short-term fluctuations in cryptocurrency prices, the adoption of blockchain technology and its potential impact remains encouraging over the long run. Blockchain offers substantial promise to revolutionize countless industries and companies in this space should continue to garner strong interest from both strategic and financial acquirers.

About Berkery Noyes

Founded in 1980, Berkery Noyes is an independent investment bank that provides M&A advisory and financial consulting services to middle market companies in the information and technology industries.

About Peter Ognibene

Peter Ognibene is a Managing Director in the Business Software/Services and Financial Technology Groups at Berkery Noyes. He has managed hundreds of both sell-side and buy-side transactions during his career. Peter holds a BA from Syracuse University and an MBA from New York University. 

Footnotes

[1] CoinMarketCap. https://coinmarketcap.com/

[2] Blockchain Technologies. “Smart Contracts Explained.” https://www.blockchaintechnologies.com/blockchain-smart-contracts

[3] Ravid, Barak. “Blockchain’s power revolutionizes M&A.” EY Parthenon. https://parthenon.ey.com/po/en/perspectives/blockchains-power-revolutionizes-m-and-a

[4] Enterprise Ethereum Alliance. https://entethalliance.org/

[5] “Blockchain Investment Trends In Review.” CB Insights.  https://www.cbinsights.com/research/report/blockchain-trends-opportunities/

[6] Deloitte Blockchain Survey 2017. https://www2.deloitte.com/us/en/pages/about-deloitte/articles/innovation-blockchain-survey.html