Crypto derivatives exchange Deribit is selling 10% of its equity at 9-figure valuation

Crypto derivatives exchange Deribit is selling 10% of its equity to market maker QCP Capital and crypto fund Three Arrows Capital at a "three-digit million" valuation.

According to a pitch deck reviewed by The Block, the two investors will reserve the majority of the 10% in common equity that's being made available, while actively seeking investors to fill the rest of the deal. The investment deck was compiled by QCP and Three Arrows. 

"This is a secondary market structured offering, not a primary issuance from Deribit itself, as Deribit is one of the most profitable cash-generating businesses in all of crypto," Three Arrows Capital CEO Su Zhu and QCP Capital managing director Darius Sit told The Block in a joint statement. 

QCP and Three Arrows are pitching Deribit as a company of "great value," having a competitive valuation compared to its rivals such as U.S. regulated firms like Bakkt and crypto-native companies like BitMEX. The exchange is being positioned between BitMEX and FTX, which have estimated valuations of $8 billion and $700 million to $1 billion, respectively. 

Deribit declined to comment when reached. When contacted, Zhu and Sit said of the company:

"They have consistently made the right decisions, from focusing entirely on BTC and ETH, to launching continuous interest perpetual swaps, to competing head to head with Bitmex, to a highly sophisticated partial liquidation engine to protect users funds. Their options market share at 88% is due to the fact that all professional traders are using Deribit to exchange risk. This will only continue as other exchanges enter the foray and help expand the overall pie." 

However, several market observers described the deal's valuation as "too high," given that Deribit has not built up a large enough trading volume that can help it fend off new competitors in the ecosystem.  

"[The valuation] seems high given their cashflow in traditional investment perspective, but they are the top option derivative exchange in this market and will probably remain to be as the market grows. So the premium is more than validated in the crypto market," said crypto market maker Altonomy co-founder Ricky Li. 

Sizing up the competition

Although Deribit currently dominates the crypto options market, players like Bakkt, FTX, OKEx, and CME have all recently entered the options space.

According to data shared by Deribit with The Block, the exchange saw a total of $116 billion traded on its platform in 2019. It also experienced steady growth in monthly trading volume from January to June, hitting over $17 billion.

However, that monthly volume figure dropped significantly from July to August and did not see a return to its June high until the end of the year. 

In the deck, the investment firms also made note of the rising competition, but contended that Deribit's strong liquidity will attract orders to be routed to the exchange from other platforms, such as LedgerX.

Interestingly, in August, Marius Jansen, Deribit's chief operating officer, said that the firm had turned down several nine-figure investment bids as they were “very comfortable with how things are.” 

Besides fortifying its first-mover advantage in the options market, Deribit's planned fundraising could also be used to finance its operation in Panama. 

The firm announced earlier this month that it is moving from the Netherlands to Panama to avoid the potentially challenging mandates of the Fifth Anti-Money Laundering Directive (5AMLD), which went into effect on January 10. 

Meanwhile, the soon-to-be Panama-based exchange is also said to be considering tokenization or a token sale of some form, though it is unsure whether and when such an event will be pursued. 

Update: A previous version of the story stated that tokenization or a token sale may take place years after the current deal is closed. This information has since been updated. The headline has been updated for clarity.