The crypto industry continues to mature, even during these bearish times, according to a recent report from PwC. The Big Four accounting firm’s findings showed that although the number of merger and acquisition deals in the crypto space decreased by 40% in 2019, the funds are now going to established companies instead of seed-stage startups.

Additionally, crypto-native actors are beginning to take the stage from institutional investors as the market becomes more consolidated and less United States-centric. So, what exactly does it mean for the industry, and will institutional investors’ interest in crypto ever be roused again?

Crypto winter’s impact has stretched over years

As the cryptocurrency market was experiencing its so-called “crypto winter” throughout most of 2019, there were some notable consequences in the M&A sector when compared to the previous year, the PwC report suggests.

While 2018 was also predominantly bearish, the decline trend accelerated only in the second quarter, reaching a critical point in December when the term crypto winter came into widespread use. The cash outflow was therefore more noticeable in 2019, as institutions had started to cut ties with the crypto industry by that time. As Jeff Dorman, the chief investment officer of the crypto-oriented investment management firm Arca, explained in a comment to Cointelegraph:

“In 2018, after the bull market died down, it became apparent that there were so many more service providers in crypto than there were customers, and furthermore most of those service providers didn't have perfect product-market fit.”

Indeed, fundraising efforts in the crypto space reportedly generated 40% less last year, while the number of M&A deals dropped by 40%. Mining was the main sector to take the hit as the industry became much less profitable due to free-falling cryptocurrency prices. Even juggernauts as large as Bitmain were experiencing major difficulties. As a result, mining accounted for a mere 15% of crypto M&A deals last year, becoming the least popular sector in that regard.

Consequently, crypto M&A deals experienced significant diversification in 2019, as investments started to shift toward crypto solutions and peripheral sectors such as media, consultation and research.

The U.S. is no longer ground zero for M&A deals

According to the report, the Americas lost their majority stake in the combined value of fundraising and M&A deals, with its share dropping from 55% to 48%. The Asia–Pacific region along with Europe, the Middle East and Africa now take up most of that pie, with their combined value growing to 51%.

Experts’ opinions as to why the U.S. is falling behind are divided. Bobby Bao, who co-founded the Hong Kong-based cryptocurrency platform Crypto.com and has previously worked in mainstream M&A at Deloitte and China Renaissance, believes it is a matter of business mentality varying between different regions. He told Cointelegraph:

“Commonly speaking, we see more U.S. crypto companies primarily tend to focus on their own core business while Asian companies' growth strategies have a higher tendency to focus on diversification of their offerings while being more aware of ecosystem-building and expansion.”

Regulatory uncertainty and market penetration in the U.S. might be the primary factors behind these figures, added Joshua Frank, the CEO of The Tie, a provider of data for digital assets. He suggested that some firms deliberately choose to operate from jurisdictions with lax regulation:

“Crypto has not penetrated the United States market as well as it has other markets. Another issue is that regulatory uncertainty has placed significant barriers on the ability for start-ups and new entrants to operate inside of the United States. Others countries’ regulations are more conducive to growth within the digital asset sector.”

Countries like Singapore, Japan and Malta offer more blockchan-friendly regulation, and it is easier for crypto actors to relocate their businesses to those countries instead of complying with U.S. authorities, Arca’s Dorman told Cointelegraph. He also highlighted another potential reason for the trend: there are a lot of established players in the U.S. crypto market, while M&A targets are predominately unripe:

“The majority of the U.S. crypto market is now made up of mature businesses. These are less likely to be targets of M&A (though they could be acquirers). Newer, smaller companies are more likely to be the target of acquisition activity and those are now incorporating outside of the U.S.”

In light of this, Jack O'Holleran, the CEO of Skale Labs‚ a startup that had over 40 investors contribute to funding rounds for its decentralized, Ethereum-compatible network — suggests the PwC data might not be entirely accurate:

“I think the data that deals are shifting out of the U.S. is misleading because there are many strong teams with U.S. employees in crypto that are domiciled outside of the U.S. We do see strong project growth outside of the U.S. in certain pockets, but Silicon Valley is still producing the most startups by a clear majority.”

Industry is becoming consolidated

Another major highlight from the PwC paper is that the crypto industry is becoming more consolidated and mature. According to the report, more than half of the M&A activity in the sector in 2019 was driven by crypto actors, while fundraising “trended towards later stage companies.” As many as 90% of M&A deals in the sector were “strategic in nature” and driven by crypto-focused players, the brief summarized.

Consolidation “is necessary and is a sign of maturation,” especially given that no digital asset firms seem to be truly monopolizing segments of the market, Frank argued in an email exchange with Cointelegraph. He summarized: “Consolidation enables firms to achieve economies of scale, share knowledge and networks with the firms that they are acquiring, and ultimately develop better products for the end user.”

Such unification is “a good sign that we have an evolving ecosystem in crypto,” O’Holleran admitted, but nonetheless it reminds us that this industry will likely remain unique. “The end state of market maturity will be extremely different from traditional software markets due to the decentralized nature of the tech and organizations.” Bao appears more critical of the current situation with the crypto M&A market, but is nonetheless confident about its future:

“Back in 2017/2018 there was a lot of M&A noise, as the number and size of deals in the crypto space rose steadily and set new records. But that excitement slowed down fairly quickly; as the market hype faded away and as more restrictive regulation stepped in, both the private and public markets experienced a shakeout. However, the short-term shock will not change the long-term growth trajectory of this industry, which is undeniably up.”

Explaining potential reasons for the consolidation trend, Jack Purdy, an analyst at the crypto research firm Messari, told Cointelegraph that it might be “predominantly a result of the bear market making it difficult to generate revenue or raise additional funds.” He elaborated that “strong teams with potentially useful products are getting scooped up by bigger players that see an opportunity to create ancillary income sources.”

The latest example of such an M&A deal in the industry would be Binance — the world’s largest cryptocurrency exchange — announcing earlier this month that it was acquiring CoinMarketCap — one of the most-referenced crypto data websites — for an undisclosed price.

Related: Crypto Community Largely Approves of Binance Acquiring CoinMarketCap

As for 2019, the top three M&A deals included the U.S.-based crypto exchange Kraken acquiring the United Kingdom-based crypto trading platform Crypto Facilities for at least $100 million, the Indonesian ride-hailing giant Gojek buying the Philippine crypto-related company Coins.ph for a reported $72 million, and U.S. crypto powerhouse Coinbase purchasing fellow custodian Xapo for $55 million.

Institutional investors’ interest is not lost entirely

The consolidation trend also confirms that institutional investors are becoming less interested in the crypto industry. Regulatory instability, which has been omnipresent since the crypto boom, is the key factor and will likely remain an obstacle in the coming years, according to Bao:

“Traditional financial institutions, such as venture capital, are limiting the number of funds they are directing to the crypto industry, largely due to the number and the ever-changing complexity of regulations, which tend to scare off or confuse traditional VCs. As the crypto industry matures and expands, more regulations will come out and may lead to a quiet M&A market for a while.”

The majority of traditional Silicon Valley firms “are patiently waiting for the market to take form,” O’Holleran opined. Purdy agreed while adding that the prevalence of bad actors and “general lack of professionalism” during the period of 2017–2018, a time when the market was actively roaring and hence started piquing the attention of traditional venture capitalists, were also among primary reasons. However, he noted that those developments were necessary for industry:

“The bear market has given the industry a much-needed purge of many of the tourists and those looking to make a quick buck leaving only the true believers with an influx of incredible talent coming in by the day. I don't think it will be long until this is recognized and the traditional VCs will slowly start to come back.”

The total value of M&A deals in 2019 constituted around half a billion dollars, and it is currently unclear if 2020 will top that number. The authors of the PwC report note that the COVID-19 crisis, which has been disrupting the global economy, will also affect the crypto sector and potentially curb the amount and value of M&A deals in the industry, among other things.