Bitcoin Depot: Analog Approach To Digital Currency

Arguably one of the lesser-known public equities in the world of cryptocurrencies is Bitcoin Depot (NASDAQ:BTM). Bitcoin Depot operates a Bitcoin (BTC-USD) ATM business and came public via SPAC merger in late-June. It's been a rough go for stockholders as the price is currently down over 70% since the company came public.

In this article, we'll look at Bitcoin Depot's business model, latest earnings report, and try to determine whether the stock is worth a look after such an aggressive selloff.

The Business Model

As mentioned in the introduction, Bitcoin Depot operates a Bitcoin ATM, or "BTM" business. The company currently touts nearly 12,000 Bitcoin Depot locations and has primarily serviced the unbanked or underbanked consumer in the US and Canada. When a customer wants to buy Bitcoin with cash, they are able to do so by using one of Bitcoin Depot's machines with the delivery of the asset going to the wallet address of the user's choosing.

While the company has developed an application that is intended to help streamline purchasing, the wallet itself is non-custodial. When a user deposits cash into the kiosk, BTC comes out of Bitcoin Depot's hot wallet and the funds are deposited to the buyer's address. In addition to the physical kiosks, the company also has non-kiosk BTC purchase availability through its BDCheckout service where customers can buy BTC at checkout registers of integrated retailers or through debit card purchases directly on the company's website.

For the third consecutive quarter, the median transaction size at the company's kiosks was about $200 and Bitcoin Depot is positioning itself as a Bitcoin-business that is uncorrelated to the price volatility of Bitcoin.

Even as Bitcoin sold off dramatically from a Q4-21 high near $70k, Bitcoin Depot has continued to generate more transaction volume despite the lack of market FOMO that was witnessed a couple years ago.

Q2-23 Earnings & Balance Sheet

In the second quarter, Bitcoin Depot reported $197.5 million in total revenue; an 18% improvement over the prior year period. Cost of revenue grew slightly less at just 12% from $149.2 million last year to $167.2 million this year. This helped Bitcoin Depot improve gross profit margin from 8% in Q2-22 to 13% in the recently reported quarter. Despite those improvements in both revenue and gross profit margin, the company flipped from $4.1 million in Q1-23 net income to a net loss of $4 million in Q2-23.

This shift from profitable to net loss was almost entirely attributable to a PIPE financing agreement that added an additional $9.2 million in expenses in Q2. From a balance sheet standpoint, I view Bitcoin Depot's current position as less than ideal:

Source: Bitcoin Depot, Q2-23 10Q (unaudited)

The company has enough cash to get through another few quarters, but things are going to get tight by 2025. Bitcoin Depot has more current liabilities than current assets and the company recently refinanced a $21 million note at 17% interest that matures in June 2026. $16.1 million of that obligation is non-current and there's a $1.7 million exit fee on top of the debt and the interest.

Service Charges Are A Concern

As a kiosk business, Bitcoin Depot has costs of revenue that other crypto on-ramp businesses like exchanges don't have. For instance, Bitcoin Depot pays retailers to lease the space where the kiosks are physically located. Additionally, the company has to pay for armored security and transportation of the cash deposits that it receives at the kiosks. These costs are passed down to the customer and it makes for what I view as an uneconomical transaction for the end-user.

While Bitcoin Depot's app has an average 4.3 rating through both the iOS and the Google Play app stores, the "most relevant" reviews read very similar to this one from October 23rd, 2022 via Google Play store:

Although the ATM transaction itself did work, the way they list the price is misleading and their actual markup is very high.

All of the top 4 most relevant reviews on Google Play as measured by helpful votes garnered 1-star ratings with fees generally being the common critique. However, Bitcoin Depot also offers online sales with debit or credit cards but the take rate is even high for the company's online purchases:

In the screenshot above, I'm showing what would be an average $200 Bitcoin buy through the company's online purchase option. At current Bitcoin spot pricing, the buyer would receive less than $175 in BTC when buying the digital asset this way. This is uncompetitive versus something like Moonpay which would yield the buyer closer to $186 on a $200 purchase and that company offers more than just one digital asset.

Of course, the kiosk business is overwhelmingly the revenue driver for Bitcoin Depot as it accounted for over 99.5% of the company's total revenue through the first 6 months of 2023.

Additional Risks

As a company operating a Bitcoin-based business, Bitcoin Depot is exposed to many of the same risks that fundamentally impact every other company in the industry. One such concern is the demand for the product or service could diminish over time. Also, regulatory compliance could be difficult as Bitcoin Depot still lacks a New York Bitlicense after nearly three years trying to acquire one and there isn't a real time table for when the Bitlicense may be received.

Source: Merchant Machine via GFMag, 2021

Interestingly, the company currently operates in just two countries, the US and Canada. Each of which have much smaller unbanked segments of their populations compared to other countries that could theoretically benefit more from Bitcoin Depot's more cash-focused services. However, roughly two-thirds of Bitcoin Depot's clients are using the service for remittances and online purchases. This may be an indication that there is actually a fairly good product market fit in North America if those funds are being purchased to be sent elsewhere globally.

Summary

There are other concerns to be aware of. In my view, Bitcoin Depot is fairly reliant on one retailer with Circle K accounting for roughly a third of the company's transaction volume. There's also substantial dilution risk in holding BTM shares given all of the warrants and recent share registration. I think Bitcoin Depot is actually a somewhat interesting concept but I think those fees are tough to overlook.

As traditional financial firms appear poised to enter the Bitcoin and crypto arenas, it's not out of the realm of possibility that the current ATM infrastructure providers could start competing in this space domestically and abroad. It's also not out of the realm of possibility that stablecoins could take share of remittances from Bitcoin. As a Bitcoin-only seller, this would have a negative impact on Bitcoin Depot and with less than 30% of the company's surveyed users buying BTC as an investment or store or value, I think stablecoin adoption is a legitimate long term concern.

Bitcoin Depot has the market share lead in the US-based Bitcoin kiosk space, but I ultimately can't get passed the fees or the plethora of other issues. I'm staying away from this one for now.