🤝 Let’s M&A-ke a deal

Welcome to the Forward Guidance newsletter, brought to you today by Ben Strack. Here’s what you’ll find in today’s edition:

• How the latest crypto M&A deal was born from 2024 developments.

• The most pro-crypto Congress ever steps into power. Now what?

The latest crypto M&A deal makes more sense when considering the segment’s evolution in 2024. 

Digital asset prime broker FalconX bought trading firm Arbelos Markets in a bid to become one of the market’s largest crypto derivatives dealers.

FalconX, in a Thursday news release, noted the institutional market’s significant growth over the past year, “driven by positive regulatory momentum along with the growth of ETF and derivatives markets.”

The company added: “Similar to traditional asset classes, crypto derivatives will continue to scale to be many multiples of spot markets.” 

After bitcoin ETFs launched in January, the SEC approved options — contracts representing the right to buy or sell them at a certain price for a specific period of time — on the biggest of those products, BlackRock’s iShares Bitcoin Trust (IBIT). 

Industry watchers told me options would spur a more robust ecosystem around the spot ETFs, enhancing liquidity and price discovery. The tool essentially attracts institutional investors looking to better manage their bitcoin exposures as market conditions fluctuate.

Michael Klena, a partner at advisory firm Architect Partners, called this FalconX purchase “a logical progression in the market” as more demand and supply fosters more deals.

The institutional trading spurred by regulatory changes (ETF approvals) and expected crypto-friendly frameworks “means the larger firms are now able to move more aggressively to acquire and be confident not to get in the crosshairs of the regulators,” he said. On the supply side, there are a number of newer crypto derivatives firms (i.e. Arbelos, D2X and One Trading), but no one dominant player.

Another point: “Derivatives are a higher-margin product than spot trading, so firms will look to expand their offering as trading fees are compressed,” Klena said, noting the same thing happened in equity trading. 

We saw Cboe Global Markets close its acquisition of ErisX in 2022. Coinbase, that same year, bought derivatives exchange FairX.

“But timing was a bit early on those deals due to the not-yet-seen regulatory clarity,” Klena told me. “We are now hearing firms saying that timing is looking better.”

Alongside the advent of crypto ETFs and pending regulatory clarity, Arbelos Markets CEO Joshua Lim in a statement labeled growing acceptance of crypto as a diversifier in portfolios as yet another reason this is a “critical moment” for this combination to occur.

You may recall BlackRock’s recent guidance that a 1-2% allocation to BTC is “reasonable.”

We saw a flourish of crypto M&A deals right after the election. Klena anticipates more deals to come around derivatives trading and infrastructure.

— Ben Strack

You already know a bunch of pro-crypto political candidates won their elections in November. Today marks the start of seeing what that will mean.

Well, sort of. The Republican-led House gathered just hours ago to begin voting on whether to re-elect Mike Johnson as its speaker. So there’re some other things to deal with before crypto-related matters take center stage.

But it appears they will eventually, with crypto market structure and stablecoin legislation expected to gain attention in the coming months. As mentioned yesterday, Rep. French Hill tapped Allison Behuniak — staff director of the House Financial Services Committee’s digital assets subcommittee — to serve as the committee’s policy director.

Stand With Crypto put the final tally at 298 crypto-friendly legislators in the 119th Congress. The organization also hosted a coffee gathering Friday in an effort to “build camaraderie among the pro-crypto legislators, policymakers and community members.”

Coinbase chief policy officer Faryar Shirzad was apparently in attendance, posting a coffee pic to X. Two days earlier, he shared the following expectation for the new year:

When I interviewed Shirzad in October (prior to elections), he measured the industry’s 2024 success by seeing virtually no candidates push an anti-crypto message.  

“Because I don’t think it has any resonance,” he explained at the time. “I think you can fit every anti-crypto voter in the country all in a single bus — maybe even a single minivan.” 

One X user warned this morning that it’s one thing to “talk the talk” in a pre-election survey. Keeping the pressure on the lawmakers — letting them know “they are constantly being watched and scrutinized” — is the next step.

That’s a good idea for industry players, sure. But the optimism around these politicians following through seems to be rooted in something real. 

As Blockchain Association CEO Kristin Smith said in a Nov. 6 X post when describing the biggest post-election takeaway: “There is zero electoral upside to being anti-crypto.”

— Ben Strack