On February 26, fintech startup Circle announced it had closed a deal to buyout the cryptocurrency exchange Poloniex for reportedly $400 million—it is the largest acquisition in crypto history. The acquisition is intriguing because it may reveal information about the trajectories of Circle and Poloniex, sentiment of Circle’s venture capital backers, and new services that the consolidation can offer crypto investors.
Circle was founded in October 2013 as a peer-to-peer payments company. The Boston-based firm has raised over $140 million in venture capital from funding rounds led by Goldman Sachs (NYSE: GS). Its initial investors include China’s IDG Capital, Jim Breyer, General Catalyst, Accel Partners, and Baidu (NASDAQ: BIDU). Circle’s original goal was to make sending money as easy as sending a text.
The acquisition is not Circle’s first foray into crypto. In fact, Circle was founded as a unique fusion of payment startup Zelle and easy-to-use exchange Coinbase/GDAX. Its app allows users to transfer money linked from their debit cards and bank accounts to other users instantly. Until December 2016, Circle also operated a one-click Bitcoin (BTC) exchange, allowing users to buy, sell, deposit, and withdraw with ease. Its exchange was free of transaction fees, compensated by a larger spread, allowed credit card purchases, and introduced many people to crypto. But Circle shut down its exchange to focus on competing with money transmitters like Zelle and Venmo, as well as an experimental remittance platform to serve the unbanked. It also launched Circle Trade, an over-the-counter trading service for institutions, making Circle a large market maker for ultra-high net-worth investors.
It seems that Circle regretted exiting the retail trading sector, saw the record growth by peer exchanges like Coinbase/GDAX, Gemini, and Kraken in 2017, and wanted a piece of the profits as well as an escape from the cutthroat competition with big bank-backed Zelle and Venmo. Instead of reviving their web trading platform, they figured buying an established exchange would be more worthwhile. Circle has stated that it will keep Poloniex’s existing trading pairs and add EUR and GBP pairings.
Poloniex is one of the world’s premier crypto exchanges. The Boston-based exchange traded $140 million in volume yesterday. But it has mixed reviews on customer service and major issues with transfers and support tickets. Also, Poloniex is struggling to address the massive influx of new customers in the last year. Circle has expertise in compliance with know-your-customer (KYC) and anti-money-laundering (AML) regulations and can help Poloniex efficiently process new customer registrations and improve customer support. Since an internal memo stated that the Security and Exchange Commission (SEC) gave Circle its blessing for the acquisition, Poloniex it will provide a safer, regulated experience for new altcoin investors.
Current altcoin owners should celebrate the Wall Street-backed acquisition. Circle CEO Jeremy Allaire told CoinDesk: “It's a turning point in that we’re really right on the cusp of major consumer products being able to be built on top of these markets and this infrastructure. From our perspective, pulling this all together, pulling this under one roof, allows us to realize those broader ideas for consumer products.” That means Circle wants a one-stop fiat and crypto solution for its customers going forward. Because Poloniex offers trading in obscure altcoins like Dogecoin (DOGE), Augur (REP), Golem (GNT), FoldingCoin (FLDC), among others, the post-acquisition influx of consumer demand will cause altcoin prices to rise.
One last thing to note is that Circle is in the midst of launching its own trading platform. Circle Invest, slated to be released later this year, will offer retail investors commission-free trading, custodial accounts, institution-grade liquidity, and secure storage. Perhaps Circle’s Poloniex acquisition is only part of its grand plan to reenter and regain dominance in the crypto space.
The author holds a long position in BTC.