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Crypto News Updates

Coinbase Earnings: Some Less Obvious Takeaways

Besides significant growth, what does all this mean? What are the unanswered questions?

This content was originally published on Ellie Frost’s Substack.

In case you missed them, below are the main results from yesterday’s earnings.

  • $1.8 billion revenue
  • $1.1 billion adjusted EBITDA
  • $730–800 million net income
  • $223 billion assets on platform
  • 56 million verified users (VU) and 6.1 million monthly transacting users (MTU)

What does this boil down to? I had three main takeaways and questions regarding trading take rate, users and 2021 projections.

Trading Take Rate

We are only provided a total revenue of $1.8 billion. If you arbitrarily take this and the $335 million volume, you would get an impressive ≈54 bps as Q1’s take rate. Huzzah! Does that definitively mean that the take rate remained high because retail users came in force? No.

There are three lines of revenue: transactional, subscription, and other. Note that “net revenue” is considered transactional and subscription. However, these three lines of revenue all have different drivers.

Source: S-1 Filing
Source: S-1 Filing

Transactional revenue is based off of trading volume, which is largely driven by volatility.

Subscription revenue is custody, staking fees, and so on, so it is largely driven by assets under management (AUM).

Other revenue is when they sell their treasury of BTC, ETH, and other cryptocurrencies.

Source: S-1 Filing

So, you should only be calculating a ratio of trading volume to transactional revenue. For 2020, this was 86 percent of total revenue, but we do not yet have that detail here to definitively say how much of the total revenue was actually transactional.

As an example, assets on platform (AoP) grew from $90 million in Q4 2020 to $223 billion in Q1 2021. People may have bought two quarters ago and kept AoP. With rising asset prices, Coinbase may earn more revenue off of them, but this revenue has nothing to do with this quarter’s trading volume.

Where does that leave us with scenarios for the Q1 revenue? Several possibilities come to mind:

Scenario A. They actually did have massive transactional revenue that made up the majority of the $1.8 billion revenue. The high take rate would imply that retail users came in droves and were using the mobile app that carries higher fees.

Scenario B. They’re getting more revenue from subscription revenue due to higher AUM.

Scenario C. They sneakily sold off more assets in other revenue to put total revenue ahead of their IPO (they’d get called out eventually on this so I doubt it).

User Metrics

User metrics were another win. With 56 million verified users, Coinbase sits far ahead of Robinhood, CashApp and Venmo. But it was also exciting to see the growth trends of VUs and MTUs side by side. MTU growth quarter on quarter strongly outstripped VU growth, which could indicate that Coinbase is successfully resurrecting inactive users.

Source: Data from S-1 Filing and 8K Filing

2021 Revenue Guidance

Trading volume is correlated with volatility, which is inherently unpredictable. Coinbase works around this by calculating retail net revenue by MTU x average net revenue per user (ARPU).

Coinbase gave an upside versus base versus downside case for their average annual MTU of 7 million, 5.5 million and 4 million, respectively. They noted that they had an ARPU of $45 in 2020 but did not list ARPUs with each scenario.

It is pretty clear they are playing the game every company plays with projections. Aggressively haircut, then smash through when they report earnings. That is, I find it doubtful they actually think their base case is 5.5 million MTU when they just reported 6.1 million in Q1.

This is what they could have projected for retail revenue for 2021. This feels low given Q1, but we don’t have revenue details yet and they want to blow out any projections given.

Source: Data from 8-K Filing

If the bull market continues, then MTUs will be significantly higher than what they’ve outlined, even in their upside case. If MTUs increase, then ARPU will rise correspondingly and 2021 could get very interesting, very quickly, for Coinbase.

– Ellie Frost

This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.

Source: Bitcoin magazine

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Crypto News Updates

Why Investors Are So Excited About MicroStrategy’s Bitcoin Acquisition Plan

MicroStrategy has announced another convertible bond raise, this time priced at $900 million, in order to buy even more bitcoin. How does this compare to its last bond offering? And why isn’t it going to stop anytime soon?

What’s A Convertible Note?

First, a convertible bond or note starts as a bond, then “converts” to equity. The company pays lower interest rates because of this potential conversion. In other words, the company will pay for it later with an equity dilution. A company may choose this route if it has bad credit or it’s expecting high growth.

MicroStrategy’s First Convertible Bond Offering

In December 2020, MicroStrategy announced its first convertible bond offering for the explicit purpose of buying bitcoin. Citi immediately downgraded MSTR to a “sell” recommendation. But, the market had a much more bullish take.

Investor appetite was so strong that MicroStrategy upsized its offering from $400 million to $550 million with the additional option for inverter’s to purchase another $100 million. All of this was filled for a total $650 million offering.

MicroStrategy also priced its bonds insanely low. Interest was 0.75 percent per year. So, payments were about $4 million per year for a company with an operating income of about $40 million. That’s 10x coverage. Meanwhile, 2x is generally considered strong.

CEO Michael Saylor went even further than this aggressive pricing by giving MicroStrategy the option to settle the bond in shares or pay out in cash. The bond was struck for $398 per share while the stock was at $289. This was equivalent to a 35 percent premium to investors.

MicroStrategy’s Latest Offering

This month, MicroStrategy announced a proposed latest offering of $600 million converts with a $90 million optional additional purchase. The announced pricing was even more aggressive than the previous offering. It upsized the offering to $900 million with a $150 million optional increase. This was offered at 0 percent interest to be settled in shares or cash, at a 50 percent premium. The offering closed today and was completely filled for the $1.05 billion raise. Clearly, investor appetite remained massive for such an upside and proposed pricing.

So, why do investors remain excited? MicroStrategy has no debt, apart from its previous $650 million convertible bond note. It can handle more, given its operating income and that its balance sheet has more than doubled from its bitcoin holding — from $1.1 billion to $3.4 billion. 

MicroStrategy owns more bitcoin than any other operating company, and it gives it a scarcity value above the value of the core business and BTC holdings. To many institutional investors, it is the company you want to invest in for an “almost free call option on bitcoin” 

Tesla’s addition of bitcoin to its balance sheet is helping normalize the practice of corporations adding bitcoin to their balance sheets as a reserve, but MicroStrategy is the only public company actively taking out debt to acquire more bitcoin. 

And, per MicroStrategy’s  “Bitcoin Acquisition Strategy” stated in its 10K, it has no plans to stop. For the foreseeable future, it will utilize excess cash flows and debt to acquire more and more bitcoin. 

MicroStrategy remains the only public company on the market continuing to take out debt to acquire more bitcoin. Its pricing of these bonds and rising stock price have shown its success in this strategy. They won’t be stopping anytime soon. 

This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Why Investors Are So Excited About MicroStrategy’s Bitcoin Acquisition Plan appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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With Record Bitcoin Buys, How Are Grayscale’s Investors Doing?

Grayscale’s Bitcoin Trust (GBTC) made headlines again yesterday with its record one-day addition of 16,244 bitcoin, adding to its stack of over 630,000 bitcoin and an assets under management (AUM) totaling about $23 billion. Evidently, business is good. So, who are Grayscale’s investors? Is GBTC’s premium an incentive, or a disincentive? And where will this fund move in the future?

What Is GBTC? 

Grayscale owns bitcoin in its GBTC trust and investors buy shares that represent a number of those bitcoin. There’s a 2 percent per year management fee, in addition to a “premium.” The premium is the difference between the underlying bitcoin value (native asset value or “NAV”) versus the market price of the holdings (what the shares cost).

There are two layers of investors. There are the base-layer investors — accredited investors selected to buy into the private placement of the fund at the “NAV” price, aka the price of the underlying bitcoin value. Base-layer investors can send USD or bitcoin and receive a number of shares equivalent to the bitcoin value (it is currently 0.00094919 BTC/share). 

One other key catch is that it’s one way. Once you put bitcoin into the trust, it can’t be taken out. Investors can sell their shares, but the bitcoin will remain in the trust and off the market. 

“Grayscale Bitcoin Trust does not currently operate a redemption program and may halt creations from time to time. There can be no assurance that the value of the shares will approximate the value of the Bitcoin held by the Trust and the shares may trade at a substantial premium over or discount to the value of the Trust’s Bitcoin. The Trust may, but will not be required to, seek regulatory approval to operate a redemption program.”

Fine print from Grayscale’s website

Base-layer investors have a six-month lockup before they can sell their shares in the open market to the second layer of investors. These secondary investors must pay the higher, market price for the shares. Again, the “premium” is the difference between the price of open market shares versus the underlying bitcoin-priced shares.

How Are Grayscale’s Investors Doing?

The largest investor is Three Arrows Capital, which recently increased a $259 million position to $1.4 billion (equivalent to about 6 percent holding in the trust). It is one of the investors taking advantage of the recent trade by getting in as a private placement at the base layer of the fund. 

By investing at the NAV, at the base layer, its shares are locked for six months, but it will then be able to sell the shares at the higher market price, locking in the premium. The premium historically stays at about 20 percent, but can pump in a bull market where demand for the shares is high. For example, it surpassed 40 percent in December 2020. 

Another investor taking advantage of this? BlockFi, which owns about 5 percent of the shares in the trust. Blockfi will give you about 6 percent return when you lend it your bitcoin, because it can then lend your bitcoin to groups like the Grayscale Trust. In this case, it lends Grayscale the bitcoin and gets in on the fund where it can take advantage of the premium. 

For those second-layer investors who are buying shares in the open market, the premium is a magnifying risk. If bitcoin dips hard, then losses will be deeper because you have the NAV (price of bitcoin) drop, as well as a drop in the premium you bought. Likewise, if you buy before a bull market and corresponding premium pump, your gains could be greater.

Why the premium? It’s the market gap between supply and demand. Demand for shares outstrips supply since new shares are continuously created but are delayed by the six-month lockup. Conversely, ETFs keep premiums in check because new shares can also be continuously created, but they have no lockup and can trade immediately. Premiums can be arbitraged away.

Is The Premium Worth It?

Why do smaller, secondary investors accept this GBTC premium risk versus a pure bitcoin buy? 

For one, you can buy it easily with your traditional brokerage account. Two, you avoid self custody. Three, there are tax advantages as it is IRA eligible. And four, if you think there’s an upcoming bull run, you can take advantage of a premium pump.

Accredited investors obviously have a strong incentive with the premium to enter the private placement, but it’s more than that. For some institutional investors, GBTC is one of the few ways they can gain bitcoin exposure. Many investment funds have governing charters restricting direct cryptocurrency investment and/or they don’t want the hassle of custodying bitcoin. But basically, everyone is able to invest in publicly-traded assets, like GBTC, so they get the best of both worlds. Their internal regulations allow it and they avoid having to self custody.

But this won’t last forever. As the market matures and there are more options to trade bitcoin on a public market (such as a bitcoin ETF), there will be fewer secondary investors willing to pay the premium and it will drop to meet lower demand. When this occurs, GBTC will likely lower its above-average 2 percent management fee and file to convert to an ETF.

Overall, the GBTC premium occurs on the secondary market and provides a very attractive trade for those accredited investors that are able to join the private placement and invest at bitcoin’s NAV at the fund’s base level. However, this premium will begin to disappear as the market matures and more options to trade bitcoin on the public market emerge.

This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post With Record Bitcoin Buys, How Are Grayscale’s Investors Doing? appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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SkyBridge Capital Says That “Bitcoin Is Better At Being Gold Than Gold”

This week, Anthony Scaramucci’s SkyBridge Capital announced the launch of its investment thesis, presentation and full website for its new Bitcoin Fund LP. Unlike other investment firms, it went a step further in explaining why it is actively choosing bitcoin over gold.

SkyBridge Capital’s main fund, with $9.3 billion in assets under management (AUM), has invested a now-roughly $300 million position in bitcoin. In December 2020, it announced that it was raising a new, separate bitcoin-only fund and had already transferred about $25 million worth of bitcoin into it. 

This week, it opened the fund to accredited investors with a minimum investment of at least $50,000. This bitcoin LP won’t trade, but you only pay a 0.75 percent annual fee and no premium. The portfolio is priced by Bloomberg’s fixed rate (XBT). This is in contrast to GBTC (a grantor trust) which trades OTC, has a 2 percent annual fee and includes a premium to bitcoin’s price. 

SkyBridge’s website is a vast library of information. It has its offering memorandum, investment presentation and investment thesis. It also includes: 

Toward the bottom of the website, it also takes a dig at GBTC’s premium and offers to walk through a “GBTC swap” to its fund. It understands the hurdles that many traditional investors face in investing into bitcoin and lean into them.

More enjoyable than reading the funny digs at GBTC, though, is reading the digs on gold. Because, as other large institutional investors have recently bought bitcoin, they have largely done so while also still holding gold.

An example is Ruffer’s ($27 billion AUM) recent $775 million bitcoin purchase through its multi-strategy fund, which was about 2.5 percent of the portfolio. This was a huge step, but still very small compared to its gold and inflation-linked bond holdings.

Another example was when the head of global equities at Jefferies recently cut the gold exposure in the long-only pension funds in favor of bitcoin. But even after this, bitcoin remains a 5 percent allocation vs. 65 percent gold bullion and gold mining holdings. 

With a bitcoin-only LP, there’s no getting around the question of “why bitcoin vs. gold?” SkyBridge needs to tackle it head on, and it does. Its investment thesis is 10 pages (not including legal disclaimers) and about one-third of them focus on why gold is inferior to bitcoin and how bitcoin will be gold 2.0.

It quickly establishes that there is a need for a deflationary asset — increasing debt, increasing money supply and low interest rates.

It then quickly asks: “Is gold to the rescue?”

No.

The major points it provide for pro bitcoin vs. gold are:

  • Fixed vs. limited supply (the gold supply increases by about 1.25 percent supply per year)
  • The tech industry will be primary driver of marginal wealth creation — a digital asset fits this 
  • More wealth is being transferred to millenials — transferability and storage of bitcoin fits this demographic

Its thesis also includes a summary graphic:

https://lh4.googleusercontent.com/qk8OZ1IUp4hJuUmReH72C2j2LdHqSJWH93_YQhghKCP_1NEpsfI8QG35be0SeCztViB_qYHIxl1P0Dd1AQ1PbV06F3z34A0YmFR5ppKQHnaoJYMG6JCu-4KvO1MX3NaDm4aki5Bc

The SkyBridge presentation expands on gold 2.0 even further, beyond the investment white paper, explaining why bitcoin is superior and also using gold as an example of potential growth.

In its opening page, it states that “Bitcoin is better at being gold than gold” and cites gold’s existing market capitalization as an example of where bitcoin’s price could grow.

https://lh4.googleusercontent.com/3h47DzyRo2yMhy1Fc7rr9FOHQG6X90RyhvpAdIy5ng1_OGW1X-oaG7jt4gUOoTzruUFqD3U9R2PgBautR--m1AaEp3NILmz0a9207oZwEw1SB2X7XIKyXF9vWbH4PiGwjp9Mrezt

The presentation and thesis continue by covering Halvings, growing adoption and bitcoin as a portfolio diversifier. But the most interesting aspect remains the fact that an institutional investor directly addresses the question of “why bitcoin over gold?”.

All in all, the launch of the SkyBridge Bitcoin LP is another strong step in Bitcoin’s adoption by investors. It notes the problematic premium with GBTC for investors and addresses head on why an institutional investor would choose bitcoin over gold.

This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post SkyBridge Capital Says That “Bitcoin Is Better At Being Gold Than Gold” appeared first on Bitcoin Magazine.

Source: Bitcoin magazine

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Who Are The Investors Backing Michael Saylor’s Big Play Into Bitcoin?

Software intelligence firm MicroStrategy made one of the boldest investment moves of the year when it invested $250 million into bitcoin, buying about 0.1 percent of the total supply in August. Its CEO, Michael Saylor, has doubled down on the move in countless public comments and earlier this month, the firm raised $650 by offering convertible senior notes with plans to buy even more BTC.

But these moves cannot be made by Saylor alone. The company’s board and investors must also see the value in a transition to bitcoin. But who are these bullish investors? How did Saylor convince them to opt into Plan B? And what does it mean for there to be a cadre of Bitcoin enthusiasts in these institutional seats?

Who Are The Investors Backing Saylor’s Big Play?

Russell Investment is the eight-largest shareholder in MicroStrategy, owning approximately 2 percent of total shares. It has recently increased this position by over 70 percent, more so than any other shareholder. It has bullishly blogged on BTC since 2018, with such quotes as: “While many are questioning Bitcoin’s foundations, perhaps even more importantly, Bitcoin is questioning the foundations of the central banks.”

Renaissance Tech (RenTech) is the tenth-largest shareholder in the company. It has increased its position by four-times since June, which coincidentally, is when it also received internal approval to begin trading bitcoin futures. 

This approval was around the time when MicroStrategy publicly stated that it was considering investing in alternative assets. At this point, we can infer that RenTech knew that bitcoin was on the table and was onboard with the idea.

My personal favorite? The Citron Fund. It was publicly bearish on BTC for three years before reversing its position this Fall, saying in an investment memo that MicroStrategy was the best Bitcoin exposure available on the public market today.

Citron bought up shares in MicroStrategy and stated a new valuation of $700 per share. This is a roughly 145 percent increase from the current price of $286.

BlackRock has decreased its total position by about 5 percent, but remained the largest overall shareholder at 15 percent. They’re also the world’s largest asset manager, managing over $8 trillion. Its chief investment officer said just last month that “Bitcoin is here to stay.” 

Its CEO went even further, saying that Bitcoin could replace gold.

How Have These Investors Been Convinced?

Saylor said it was an approximately six-month process for approval for the move into bitcoin. Six months. To allocate $250 million into bitcoin. At a minimum, I would have expected 12 months. 

Saylor has the majority voting shares and, at the end of the day, what he says goes. But it is also unlikely that he would push through such a massive policy change without significant support. So how did Saylor convince the board and shareholders to support the move?

First, they were already open to it. Russell had been blogging since 2018, RenTech had already documented recent interest in bitcoin trading. The fast timeline implies others were also curious. They don’t want to miss the boat and the fact that Bitcoin has survived for 12 years shows that it’s not just a fad.

Second, education on Bitcoin was pivotal. Saylor has stated that this was part of the process and it shows. MicroStrategy has an entire section of its website dedicated to Bitcoin materials. And that education continues. On the “Investor Analyst Day” last month, Saylor answered 25 questions during a Q&A. Ten of them were Bitcoin centered.

Finally, there are a lack of other options. Many investment funds have governing charters that don’t allow them to invest in cryptocurrencies. For others that are able to invest, they’ve cited concern over custody and security. Basically, every fund is allowed to invest in stocks, but with the Grayscale Bitcoin Trust (GBTC) — the preeminent trust giving exposure to the price of bitcoin through a traditional investment vehicle — you pay a premium to the price of bitcoin. MicroStrategy is the best of both worlds.

TL;DR: BlackRock, Russell and RenTech all likely gave their blessing in the switch to bitcoin. If MicroStrategy proves a success, they could use Saylor’s playbook to advocate for BTC at their other portfolio companies too.

This is a guest post by Ellie Frost. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The post Who Are The Investors Backing Michael Saylor’s Big Play Into Bitcoin? appeared first on Bitcoin Magazine.

Source: Bitcoin magazine