After soaring to dizzying historic highs of close to $20,000 in Q4 2017, bitcoin (BTC) retreated sharply in Q1 2018, pulling other cryptocurrencies down along with it. This correction, which more than halved bitcoin’s market cap from over $300 billion in December 2017 to just under $120 billion in April 2018, raised two fundamental questions.
The first, and understandably most pressing question, was whether this marked the beginning of the end for bitcoin. The second question, and closely connected to the first, was whether it was now time for investors to forget about bitcoin and explore the opportunity in blockchain, the technology underlying bitcoin.
BTC correction in Q1 2018 – Source Coindesk
To answer both questions, it is critical to highlight the fact that most bitcoin perma-bears,such as Jordan Belfort, aka, the “Wolf of Wall Street”, conveniently overlook one of the most basic determinants of any investment’s future – institutional capital.
Institutional investors, whether they are venture capital funds, private equity funds or funds focused on public markets, typically have long-term investment horizons (5- 10 years). Consequently, their level of exposure to a specific asset class or sector is a solid indicator of the asset’s or sector’s long-term prospects.
With this in mind, is there any institutional capital going into bitcoin and bitcoin-based companies? The answer is yes, and a resounding one at that. Even after the massive correction earlier in the year, major funds, including those owned by banking giants such as Goldman Sachs(NYSE: GS), are aggressively increasing their exposure to bitcoin and bitcoin-based companies.
This September, for example, it was reported that Goldman Sachs and Google had led a fundraising round of $25 million for Veem, a bitcoin startup targeting small businesses with enterprise solutions. Another cogent example of how institutional capital is warming up to bitcoin is the Intercontinental Exchange’s(NYSE: ICE) recent announcement that it will this November launch a startup called Bakktwhose single aim will be to create a federally regulated market for Bitcoin. ICE is the powerful trading house that owns the New York Stock Exchange and 11 other major financial and commodity marketplaces. ICE’s move to create a regulated marketplace for bitcoin will clear the way for major money managers to offer Bitcoin mutual funds, pension funds, and ETFs as mainstream investments.
These examples underscore the fact that, despite the correction witnessed earlier in the year, bitcoin is still deemed as an attractive opportunity by key investors in the U.S. and internationally. In fact, on closer assessment, bitcoin’s slump in Q1 was a blessing in disguise for the cryptocurrency. It led to temporary stagnation in the price of bitcoin, which has largely been locked in the $6000-$8000 range for the better part of the year. The absence of wild price swings has driven away speculators, who are generally more interested in short-term gains, and left real entrepreneurs committed to long-term opportunities. The latter is the category that Anil Idnani, the co-founder and CEO of GD Entertainment and Technology, Inc. (OTC Pink: GDET) considers himself to be in.
Founded in December 2017, GD Entertainment and Technology, Inc. (OTC Pink: GDET) is a New Jersey based emerging provider of a broad range of cryptocurrency solutions, including ATM transactional services, bitcoin card storage, cryptocurrency mining, and mining colocation.
Mr. Anil spoke exclusively to Emerging Growth about GDET’s prospects, noting that bitcoin’s growing acceptance among investors and consumers presented the company with a host of scalable long-term opportunities in multiple verticals.
Mining and co-location
The company commenced bitcoin mining operations in June this year with 100 mining rigs at its purpose-built 5000-square-foot cryptocurrency mining facility in Fort Lee, New Jersey. Cryptocurrency miners usually get rewarded in tokens of the currency they are mining, allowing them to monetize these tokens at prevailing exchange rates. According to Mr. Anil, the company makes $100 per rig per month (at current bitcoin prices), indicating that at current prices and current capacity they can comfortably project annual revenue of at least $120,000 ($100/rig × 100 rigs × 12 months in fiscal year).
However, this is not ambitious enough. Accordingly, the company intends to increase the number of rigs from the current 100 to 500 at the end of FY2019, and more than 1,000 rigs by the end of 2020. GDET’s revenue potential from cryptocurrency mining alone could therefore increase by a factor of 10 in the coming 24 months, comfortably taking it into $1 million + revenue territory (assuming bitcoin prices of $6000).
Moreover, GDET has been able to negotiate for competitive electricity rates at its NJ based mining facility, allowing it to operate efficiently. “Our overhead is minimal. Even at the current bitcoin price of around $6000, we are still operating our rigs above break even point,” said Mr. Anil.
Because cryptocurrency mining revenues are predicated on the prevailing bitcoin price, which is dynamic, Mr. Anil noted that there was a need for GDET to establish steadier and more predictable revenue streams. This explains the company’s decision to simultaneously pursue opportunities in mining colocation.
According to data from Coherent Market Research, the cryptocurrency mining industry is projected to increase at a 30% compounded annual growth rate to reach $38 billion by 2025. IT equipment, electricity and support technical services are expected to be a significant required area of investment. Colocation, which pools the equipment and services needed to support multiple independent cryptocurrency mining operations under one roof, is naturally the next frontier for growth.
The high growth in cryptocurrency mining will create strong demand for colocation services
“We are positioning ourselves as the WeWork of cryptocurrency mining. Just as tech startups need shared workspaces and support services, cryptocurrency miners also need the same kind of support. This is what colocation is all about. The company’s strategy to be a leading supplier of colocation services should benefit from increased investment in the sector,” said Mr. Anil. The company’s core services will include colocation, hosting through GDET’s e-commerce platform, reselling cryptocurrency machines, and dealing mined tokens and coins into the market.
The beauty about offering colocation services is that it is fee-based and gives GDET a steady source of revenue that is independent of the price of bitcoin. This should make the company’s valuation in the markets less susceptible to volatility, making it a compelling alternative to other bitcoin-based public companies whose valuation is solely driven by the prevailing price of bitcoin.
An example of such a company is Grayscale’s Bitcoin Investment Trust(OTCQX: GBTC), a private, open-ended trust that enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without having to buy and store bitcoins. GBTC’s model, while ingenuous, also has its limitations as it doesn’t present a compelling investment opportunity during bitcoin price slumps.
Bitcoin Card storage and ATMs: The next big opportunity
“In the imminent future, the number of merchants and consumers using bitcoin will reach a critical mass. To prepare for this future, we need to start building the infrastructure needed today. This is precisely what GDET is committed to doing, particularly in the retail space where millions of consumers want to own bitcoin and transact in it but don’t know where to start” said Mr. Anil.
To make bitcoin more accessible to consumers, GDET is making physical storage of bitcoins on debit and credit cards possible. Presently, bitcoins are stored in digital wallets, adding layers of complexity for non-savvy users (who happen to be the numerical majority) during retail checkout and other transactions. Being able to store bitcoins in cards and transact like you would with a regular bank-issued credit and debit card will disrupt the digital wallet space.
Earlier in August, GDET acquired California-based DreamCard. DreamCard offers solutions for customized design metal debit or credit cards in the US. GDET plans to leverage DreamCard’s capabilities in card customization and storage in order to enter the market for providing cryptocurrency-backed “white label” credit and debit cards. The rollout is slated for Q1 2019. This presents a tremendous opportunity to realise strong sales in the short-to-midterm, considering the pay card market globally is estimated at $2.7 trillion. Moreover, GDET is developing its own point-of-sale (POS) systems which will be GDET-branded and provided to merchants, allowing it to accelerate uptake of its cards.
The potential for bitcoin in the card market is underlined by the fact that the adoption of blockchain, the technology underlying bitcoin, is rapidly growing in the retail space. Pointedly, Las Vegas based fintech company Surg Holdings(OTCQB: SURG)recently announcedan MOU commitment of 40,000 new store locations utilizing the SurgePays Blockchain SaaS portal with a commitment of $1,500 per month in sales per location.
As SURG’s MOU demonstrates, there is strong demand for blockchain based technologies among retailers. Bitcoin backed cards could therefore gain momentum in the market. Early bitcoin adopters such as Overstock.com Inc. (NASDAQ: OSTK)—which was the first online retailer to accept Bitcoins in January 2014 when itpartnered with Coindesk—already set the pace for bitcoin adoption in e-commerce. The next wave of disruption will naturally be in brick and mortar retail, including neighborhood retail stores, restaurants and other businesses with high foot traffic.
The opportunity in cards is therefore immense for GDET. Importantly, Mr Anil believes that there is an equally huge opportunity in bitcoin ATMs. “The reason we are focusing on ATMs and cards is that we do not want to reinvent the wheel. Many people are ready to adopt bitcoin and cryptocurrencies; they just don’t want to depart from the convention of cards and ATMs. By introducing bitcoin-backed cards and bitcoin ATMs, we are ingeniously delivering new solutions in ways that have been proven to work,” he noted.
GDET is seeking to develop its own network of bitcoin ATMs, which are internet-enabled kiosks that allow customers to purchase bitcoins with deposited cash and sell bitcoins online. The company has already received approval by FinCEN to be an MSB Money Transmitter, which allows it to implement its ATM strategy on a state by state basis.
In the first 12 months of commercial launch, the company intends to have a network of 200 ATMs. According to Bitcoin ATM manufacturer Lamassu, Bitcoin ATM operators typically earn between $1,000 and $3,000 per month per unit. With 200 ATMs planned for the first 12 months, the revenue from transaction fees could hit $2.4 million ($1000 per month/unit ×12 months ×200 ATMs), on the lower end, and go as high as $7.2 million ($3000 per month/unit ×12 months ×200 ATMs).
This revenue projection is mindboggling for an early stage company. Moreover, regulatory approval from FinCEN, which is known for its legendary rigor, gives GDET an early mover advantage as the regulatory framework for cryptocurrency-enabled ATMs is complex and many potential competitors are still struggling to get a nod from the regulator. This puts GDET in a position to generate relatively high transaction fees per machine, making it plausible that GDET could hit the higher revenue target of $7.2 million for its ATM line of business within the first year of commercial launch.
“GDET has initially identified Texas as its first domestic market for Bitcoin-enabled ATMs, and is also exploring international markets, including the support of a network of cryptocurrency ATMs in cruise ships, which promises faster time to market and fewer regulatory hurdles for cryptocurrency transactions,” noted Mr. Anil.
As part of its plans to rollout its bitcoin ATM network, GDET has already secured a partnership with GenesisCoin, one of the largest ATM machine suppliers in the industry. With such a solid supplier, GDET could easily hit the 200 ATMs target. Importantly, operating 200 ATMs could easily make it the market leader in the U.S. “Our big competitors in the U.S. presently have between 100 and 130 ATMs. We are keen on doubling that in less than a year from commercial launch,” said Mr. Anil.
Coin ATM Radar, which tracks cryptocurrency ATM locations, reported that there were more than 3,600 bitcoin ATMs in operation globally at the end of August, with the US serving as an initial market leader with than 2,600 units. Market leadership at 200 ATMs means that GDET will have huge scope for growth, as the industry is still in its earlier stages of its growth cycle. Research firm MarketsandMarkets expects the market for cryptocurrency ATMs to grow by a five-year compounded rate of over 50% to reach $144.5mn by 2023.
Engaged eager investors
GDET is a revenue generating machine with the potential of scaling its operations at a fast pace – exactly what yield-hungry investors looking for high growth emerging companies want. The capex required to actualize its plans, particularly in the ATM space, is admittedly significant. However, with the level of potential it has, investors will be keen on providing this capital on competitive terms.
Tellingly, peers such as Xapo, which was founded by PayPal(NASDAQ: PYPL) board member, Wences Casares, has support from investors in both Wall Street and Silicon Valley. The company, which provides a bitcoin wallet combined with a cold storage vault and a bitcoin-based debit card, has raised a total of $40 million in private placementssince its founding in 2013, underlining the strong investor interest in the same space that GDET is operating in.
“We have already secured the interest of some formidable funds who are eager to be part of our journey. Consequently, we have the potential to raise up to $20 million, largely through equity. This should enable us to fund our growth and realize our targets,” said Mr. Anil. As opposed to a “toxic” type of financing, the dilutive impact that this would have on shareholders would be minimal. In view of the shareholder value that would be created through rapid revenue generation and imminent profitability, we expect shareholder value to accelerate.
At the time of writing, GDET’s market cap was approximately $1.13 million ($0.0025 trading price ×450.14 shares outstanding), making it a grossly undervalued play in view of the fact that revenues could easily surpass $10 million within 12 months of full commercial operation, as illustrated by the analysis in previous parts of the article. Such an undervalued company with clear growth prospects—forward price/sales of as low as 0.11x ($1.13 million market cap ÷$10 million projected revenue) —is an extreme rarity, particularly in a fast-growing space such as bitcoin where overvaluation is the rule rather than the exception.
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