Initial Barry Offering (IBO)
A valuation of crypto giant — Digital Currency Group
This post was originally published on August 21, 2019, and sent to Messari Pro subscribers. Click here to access all of our historical content.
Compared to traditional startups, crypto companies and projects have had an easier time getting their hands on cash — whether it’s through conducting a $4 billion dollar pre-launch token offering or tapping into the coffers of a founder who made a killing as an early adopter. We’ve seen a growing amount of traditional venture capital involvement in the last few years, but eventually, these companies will need to access the larger capital markets. Mining giants Bitmain and Canaan Creative filed for an IPO in Hong Kong but both have since fallen by the wayside. (Recently Canaan filed for IPO in the U.S.) As for the first major U.S. crypto company to IPO, if you asked me a year ago I would have unequivocally said Coinbase. However, since then we’ve seen tremendous turnover in their executive team with President/COO Asiff Hirji, CTO Balaji Srinivasan, and recently VP of Engineering Tim Wagner leaving the firm. You wouldn’t expect this level of churn in a company preparing to go public. Nowadays I’d say the most likely candidate is industry veteran Digital Currency Group (DCG). They have been around for a while and built three prominent businesses between Grayscale, Genesis, and CoinDesk.
But without any peers coming before it the question turns to how much a crypto company would be worth in public markets. In an attempt to answer this question we used a sum-of-the-parts (SOTP) analysis to arrive at a rough estimate. For those of you unfamiliar, a SOTP valuation is exactly what it sounds like, breaking a business into distinct segments to arrive at a value and then adding them up. Going about valuing each segment is the hard part and largely depends on the amount of information available. In this case, we decided to approximate annual revenue and then arrive at a value range by looking at the Market Capitalization/Revenue multiple of publicly traded comparable companies. Because businesses in crypto are inherently high risk, but also high reward, we took that range and marked them up a few multiples to account for that.
First up is Grayscale Investments. Grayscale is an asset manager with $2.50 billion in assets under management (AUM). They are the provider of the well known GBTC product which mimics an Exchange Traded Fund (ETF) and have multiple flavors with exposure to Ethereum, Litecoin, XRP, and more.
Since we have the AUM and annual fees for each fund we can roughly calculate revenue. Using their updated figures as of 7/26/19 we arrive at a revenue of $50.2 million.
For comps, we initially looked at ETF providers such as Wisdom Tree but most of their funds are comprised of public market equities and charge less than 0.50% in fees. Grayscale on the other hand charges fees of 2.0–3.0%. To better approximate GBTC we looked at asset managers offering private or alternative investments in more illiquid markets. Companies such as Hamilton Lane, Cohen&Steers, and Victory Capital offer more non-traditional investments and have similar business models where their revenue is tied to the fees charged on total AUM. These companies have revenue multiples between 7x-12x, leading us to believe Grayscale could be valued around 10x-15x revenues, or $501.8 — $752.6 million.
Genesis is the largest over-the-counter lending firm in the space providing collateralized loans to institutions looking to short an asset, gain exposure, or manage working capital.
They provide a quarterly summary of their lending activity and in Q2’19 had $452.0 million in outstanding loans. As with most lending businesses, their revenue model is based on the interest they charge net of the interest they pay to depositors. We believe deposits make only a small portion of their balance sheet, so the majority of interest earned goes towards revenue. Based on conversations with similar lending desks we estimated the return on loans outstanding to be around 5.0% bringing annual revenue to $22.6 million.
There are hundreds of public companies providing loans which we needed to narrow down to approximate Genesis’ business model of providing risky crypto loans that require collateral to be posted. This led us to companies holding middle-market second-lien or subordinated debt. (Translation — smaller companies with lower credit ratings and debt that isn’t the first to get paid back in the event of bankruptcy.)
Companies such as Ares Capital, Capital Southwest, Golub Capital, and Bain Capital SF are in this market and have revenue multiples between 5.9x and 9.3x. Once again we make an adjustment and round up to a 7.5x — 10.0x multiple range giving us an estimated valuation of $169.5 — $226.0 million.
Genesis Global Trading
Genesis trading is the OTC trading arm of DCG that enables institutions and high net-worth individuals to trade large amounts of cryptoassets. While they are a trading firm, they don’t make money on capital appreciation since they are not speculators and typically stay market neutral. Rather, money is made on the bid-ask spread which is the small difference between what they will buy and sell an asset for at any given time. This spread is small and money is made by facilitating large volumes of trades. There is little information available on the notional volumes of Genesis, but a leading competitor, Circle, disclosed $24.00 billion traded last year. While far from perfect it offers a relative estimate. Assuming a 0.25% spread we estimated Genesis Trading’s revenue to be $60.0 million. The only good comp was OTC Markets Group which trades at a multiple of 6.8x giving us an approximate range of 6.0x-9.0x and an estimated valuation of $360.0 -$540.0 million.
The last part of DCG’s business is their media publication CoinDesk. While best known for the website, which has been a leading source of crypto news in the last few years, the majority of revenue comes from their annual Consensus event. Last year, CoinDesk reportedly made $25.0 million in revenue and 85% of that was from Consensus. Consensus attendance was approximately half of last years so taking 50% of that portion brings an estimated revenue of $14.3 million We were unable to find a public company with a similar events driven business model. Luckily, Money 2020, a leading FinTech media and conference company, was reportedly sold for as much as $120.0 million a few years back. We looked at attendance and the breakdown of different pricing tiers to arrive at a projected revenue of $34.2 million putting a multiple of 3.7x on the event. Using 3x-5x revenue multiple for CoinDesk puts their valuation at $43.1-$71.9 million. This estimate matches up with rumors that CoinDesk was being shopped around in May 2019 for $70 million.
The final part of DCG is their investments in both digital assets and venture companies. They reported their holdings as of 6/30/18 at $260.0 and $90.0 million, respectively. At the time, bitcoin was $6,178 and is up 60% since then, so we marked their crypto holdings by that amount. This brings their estimated total investments to $506 million.
Now for the summing part of an SOTP valuation, we add them together to get a range of $1.58 — $2.10 billion confirming their place on TBI’s crypto Unicorn list.
As with everything in this space, the valuation of DCG is highly dependent on the price of Bitcoin and the cryptoasset industry as a whole. If we were to see price levels near prior all-time highs this would change the revenue assumptions. Revenue drivers such as AUM, loans outstanding, and trading volume would all directly increase with the price going up meaning $20k bitcoin could very well make DCG closer to a three or four billion-dollar company.
Valuation is often more of an art than a science and there are many subjective assumptions, but we think this is a good starting point for how a company like DCG would be valued. If DCG does go public it would provide investors a means to get direct exposure to the space (unlike “blockchain ETFs”) without needing to hold crypto — and might fill the gap for a long-awaited Bitcoin ETF.