Notes 8/25: Bitcoin Depot’s Mysterious Earnings, Coinbase’s Margin Compression

Bitcoin Depot, a bitcoin ATM company, has reached a deal to merge with a Special Purpose Acquisition Company (SPAC) that will enable it to list in public markets. The deal values Bitcoin Depot at $885 million.

As their name denotes, SPACs are special vehicles that allow early-stage companies and startups to tap public markets for cash without making the rigorous disclosures required of public companies. They became popular during the pandemic and certain sectors of the economy benefitted due to the move towards such listings. For example, a wave of green energy startups went public in the last two years in the aftermath of worldwide concern about climate change. Investor enthusiasm for SPACs has waned in recent times, however, and the SEC has said it will apply greater scrutiny to such listings.

There have been relatively fewer takers for SPACs in cryptoland. The only other instance of a recent SPAC listing is stablecoin issuer Circle, which plans to go public before the end of this year.    

The Mystery of Bitcoin Depot’s Earnings

Bitcoin Depot is the world’s biggest Bitcoin ATM operator and has 7,000 kiosks located in 47 U.S. states and nine Canadian provinces. It has also inked partnerships with Incomm Payments, a payments technology company, and convenience store operator Circle K.

There is not much publicly available data about Bitcoin Depot’s financials. However, in its press release announcing the SPAC deal, the company claims to have (unaudited) revenues of $623 million and (unaudited) net income of $6 million. It is unclear how the company managed to earn those figures. Statements made in its press release and quotes attributed to its CEO in a Wall Street Journal report might further baffle prospective investors.

The company claims that it is not affected by the current drawdown because transaction volumes are “Historically Correlated” to crypto prices. Available data and reporting contradict its assertions. Bitcoin price plummeted to an 80 percent crash during the crypto winter of 2018 as trading volumes, which comprise a majority of transaction volumes on its blockchain, fell.  

Even the current decline in prices has corresponded with a slump in transaction volumes from pandemic highs, leading to losses at publicly listed crypto exchanges like Coinbase. However, Bitcoin Depot’s CEO, Brandon Mitz, told the Wall Street Journal that they are “doing fantastic” regardless of the market.

Taken at face value, that statement means customers are eager to purchase bitcoin from Bitcoin Depot’s ATMs. But what is their incentive to use Bitcoin ATMs? Such  ATMs are more expensive to use as compared to cryptocurrency exchanges – the most popular gateway to the asset class.

According to previous estimates, Bitcoin ATMs charge between 11% to 25% of the transacted amount as fees. Exchanges, meanwhile, are locked in fierce competition and have slashed their transaction fees to attract more users to their platform. Binance, one of the world’s biggest exchanges, is already moving to zero commission while Coinbase CEO Brian Armstrong admitted to a margin compression in a CNBC interview yesterday.

In a growing crypto ecosystem of declining transaction fees, it is unclear how Bitcoin Depot has a competitive advantage or, for that matter, how it has managed to sustain a business that generates $623 million in revenues.    

Coinbase Might Reduce Its Fees In the Future

North America’s biggest exchange, Coinbase, charges some of the highest transaction fees to purchase and trade the asset class on its platform. They might come down in the future. Or, at least, that is what CEO Brian Armstrong hinted at in a CNBC interview. According to him, margin compression was a natural consequence of a growing ecosystem. “I do think there’s going to be margin compression, eventually it has to happen at some point because everything that we’re building, you know, others, eventually you’re going to build it and it’ll become a little bit more commoditized,” he said.

A commoditized marketplace to trade cryptocurrencies is not good for Coinbase’s balance sheet, which derives most of its revenues from transaction fees. Competitors like Binance are already turning on the heat with zero commission trading. Armstrong told CNBC that it is pivoting towards subscription and revenues as an alternate source of revenue.

For tech conglomerates like Apple, subscription and services translate to a suite of products, like Apple TV and Apple music, that users can subscribe to on their platform. Coinbase’s core product is its cryptocurrency exchange. In the last couple of years, it has introduced many other services, such as staking, that contribute to its bottom line. Its launch of non-fungible tokens or NFTs was a damp squib but Armstrong has not given up on them. He says it takes two years to get a product market fit and that their foray will turn around eventually.

Meanwhile, the stock is becoming a playground for shorts investors. Short interest in the stock peaked recently. Famed investor Jim Chanos, who had earlier shorted Tesla, came on CNBC yesterday to make his case that Coinbase was overvalued. [That’s not exactly new news considering the situation in crypto].

Will the Coinbase stock undergo its own winter in parallel with the one in crypto? In the short term, at least, yes. But investors can expect a brief thaw in that winter next month when Ethereum, the world’s second most valuable blockchain, shifts to a Proof of Stake (PoS) system that will drastically cut down its energy consumption and make it scalable for future uses. JP Morgan analyst Kenneth Worthington stated recently in a note that Coinbase could generate $650 million in additional revenue from its staking offering after Ethereum’s transition. This is because the numbers for Ethereum’s ether are expected to go down after the event and its yield from staking is expected to increase.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.