Crypto consolidation is underway, and one corner of the market is especially in play

Credit Karma and Intuit. E*Trade and Morgan Stanley. Plaid and Visa. 

There's been a flurry of major acquisitions in the world of traditional financial services – a development that's echoed, albeit on a smaller scale, in the crypto space today.

The market has seen a series of deals close recently, including BitGo's acquisition of security token startup Harbor earlier this month. Elsewhere, crypto exchange Kraken has been on its own acquisition spree, scooping up the scraps of Circle's over-the-counter trading desk at the end of last year and then Australia-based Bit Trade in January.

Still, sources across the crypto industry tell me they expect this recent activity to be the tip of the iceberg and that 2020 will be shaped by a wave of consolidation across the ecosystem.

At the core of this wave lies the fact that the crypto market suffers from a shortage of investors relative to the number of service providers looking to offer custody, settlement tools or even something as straight-forward as a place to trade. Some service providers have acknowledged this backdrop. In an interview with The Block, Tagomi co-founder Marc Bhargava noted that a number of the institutional firms initially interested in the firm's product in 2018 have stayed on the sidelines. 

"And I think a lot of them were in it for the hype, but also, to be fair to them, a lot of them are looking for real use cases and are not finding all that many," Bhargava said. 

As previously reported by The Block, Tagomi and Coinbase held conversations about a potential acquisition deal in 2019. Sources have told The Block that Tagomi is in the process of raising money, though a spokesperson has denied that this is the case. 

Indeed, the lack of equilibrium between investors and service providers has played a role in driving down fees closer to zero in custody and institutional trading. Thus, service providers are not only facing more and more competition but are also competing for a shrinking pool of revenue. That could be adding pressure to firms to raise money. 

To be sure, it is early days, and few players command a stable enough market share that can't be usurped. 

"No one can definitively say that they have demanding market share and that it'll persist over the next 3, 5, 10 years," one investment firm CEO noted. "So you will continue to have newcomers into the market trying to ultimately take market share."

Still, in the process, we are bound to see a shaking out, market participants tell The Block. 

"Any company that closed a series A in the last 18 months is probably looking at a smaller market than they anticipated and they may not have the balance sheet to sustain a long run," one custody executive said. "There are also signs that the flow of VC funding – which has always been more of a challenge for crypto companies – is slowing."

One specific vector sources are looking at is the custody and so-called operational permissions market. This segment covers firms that are building various solutions aimed at making the transfer and storage of digital assets more secure.

"[I am] thinking about Fireblocks, Lacero, Copper, Curv" one exchange source noted. "There are too many for the number of clients."

Sources say new firms in the custody market have struggled to grow their client base, with some firms only having a handful of clients.

"So you combine lower than anticipated sales, harder to get funding, pricing pressure, and the challenge of building an effective go to market plan and you see that shacking up with a bigger player may be the easier path to survival," another source said.

Still, firms could find success in breaking out of the crypto market. 

Curv, for instance, broke out of the crypto-native market in a big way at the end of 2019 via a partnership with Franklin Templeton. In November, Franklin Templeton announced it would leverage Curv's institutional wallets to protect digital assets tied to new money market funds. Bakkt, which offers institutional custody, is looking to support a wide range of digital assets, not just bitcoin.

"Crypto is like space, it's ever-expanding, and I'd be hard-pressed to say that any one shop or person is on top of everything happening at any given point," one source noted.