In a story so tailor-made for the height of 2021’s bull market that you might think it was generated by a bot using some of that year’s most popular investment themes, a Bitcoin (BTC -0.86%) ATM operator is going public via SPAC. GSR II Meteora Acquisition Corp. (GSRM -0.05%) has reached a deal to take Bitcoin Depot public, which values the nation’s largest Bitcoin ATM operator at about $885 million.
Since the pinnacle of the SPAC boom in early 2021 and crypto’s zenith in late 2021, both types of assets have fallen on hard times as rising interest rates, soaring inflation, and an uncertain economy have diminished investor appetite for risky assets. However, a buzzy merger like this is still bound to get plenty of attention from investors. So is there more sizzle than steak, or is there something of substance here? Here are two green flags and one red flag for Bitcoin Depot.
Bitcoin Depot is profitable
Founded in 2016, which is ancient in crypto terms, Bitcoin Depot says it is North America’s largest provider of Bitcoin ATMs, with about 7,000 kiosks across the United States and Canada. Its Bitcoin ATMs can be found at locations such as Circle K, a popular convenience store throughout much of North America. Bitcoin Depot estimates that it has about 20% of the share of the Bitcoin ATM market in the United States and about 8% in Canada.
Unlike many companies that went public via SPAC and have seen their stocks fall precariously as some of the froth left the market, Bitcoin Depot is profitable, at least on a non-GAAP (adjusted) basis. In 2020, the company earned $21 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and grew this number to $29 million in 2021. Bitcoin Depot makes money by charging ATM fees for these transactions.
Bitcoin Depot is performing during a crypto bear market
Bitcoin itself is down 53% year to date, and many other cryptocurrencies are down even more. This has caused shares of high-profile crypto-related stocks such as Coinbase (NASDAQ: COIN) to sell off this year to the tune of 78% as trading volume has declined. However, Bitcoin Depot has surprisingly bucked the trend here, and its business is not only surviving but thriving during the crypto winter. During the second quarter of 2022, Bitcoin Depot reported record revenue and EBITDA. CEO Brandon Mintz attributes the record results during a crypto bear market to the growing number of real-world use cases for crypto. In August, Bitcoin Depot reported that over the last 12 months, it achieved $623 million in sales, for a 51% year-over-year gain. The company also grew EBITDA from $14 million during the first half of 2021 to $22 million during the first half of 2022.
Bitcoin Depot’s transaction volume appears to be uncorrelated with the price of Bitcoin. For example, while crypto prices plummeted from the first quarter of 2022 to the second quarter, Bitcoin Depot saw transaction volume rise to an all-time high.
The main concern: Regulatory scrutiny
There’s a lot to be excited about with Bitcoin Depot, thanks to the company’s profitability and momentum. However, there is also some reason for caution. The Bitcoin ATM industry could be a target for regulators, as skeptics allege that crypto ATMs are often used for money laundering. The FBI has warned consumers that Bitcoin ATMs are often used by bad actors to facilitate scams. Scammers use the ATMs to put a crypto twist on a variation of an age-old scam where they contact unsuspecting victims via phone and instruct them to deposit money into a kiosk and then trick or coerce them to send Bitcoin to their wallet via a QR code, often under the guise of helping a relative that is in trouble and needs money . However, CEO Brandon Mintz says that the company employs extensive compliance measures at their kiosks, including Know Your Customer (KYC) and Anti Money Laundering (AML) programs. The company reports that it uses procedures like asking for identification, a wallet check, OFAC screening, and more before facilitating transactions.
Even if usage is legitimate, some critics say that crypto ATMs can take advantage of economically disadvantaged consumers (who may turn to them because they don’t have access to online bank accounts) with high fees. That said, plenty of online crypto brokerages also hit consumers with high fees, so I don’t think Bitcoin Depot should be singled out as a target in this area.
An interesting risk-reward profile
When I first heard about a Bitcoin ATM operator looking to go public in 2022, I was somewhat skeptical and figured that they had missed the boat on what would have been a big payday in 2021. But I have to give credit where credit is due, and Bitcoin Depot looks like a more interesting investment opportunity than I initially thought. The company is profitable on a non-GAAP basis and is growing revenue and profit even as the broader crypto space is in a bear market, so it deserves credit for that. Transaction volume has remained strong even as the price of Bitcoin has plunged, which shows that this business may be more resilient than one would think at first glance. Furthermore, the company has plenty of growth opportunities ahead, such as its BD Checkout option, which allows customers to purchase Bitcoin at retail locations without using an ATM. It also has growth opportunities in the form of international expansion and expansion into states such as New York, where it has not yet been approved to operate but could prove lucrative.
There is still risk here, especially given the possibility the industry and company could face continued regulatory scrutiny and the fact that this is an early stage investment. All told, I am more bullish on Bitcoin Depot than I expected to be before learning more about the company. For risk-tolerant investors, I think that it offers an intriguing risk-reward profile that skews toward the positive.