Summary Bitcoin Depot's aggressive BTM expansion hasn't translated to increased value, facing regulatory challenges and declining revenues, raising concerns about long-term viability. New legislation imposing transaction limits and markup caps in several states has significantly impacted Bitcoin Depot's operational environment. The CEO's optimism about future growth contrasts with ongoing operational challenges and risks from potential further regulatory actions. The proposed dividend strategy is questionable, given BTM's declining revenues, negative equity, and the typical volatility in the cryptocurrency industry. This is a follow-up to the earlier Bitcoin Depot ( BTM ) I covered in March, titled “ Bitcoin Depot: Watchlist Worthy .” The stock caught my interest, being one of the very few Bitcoin (BTC-USD ) stocks that hadn't picked up from the momentum Bitcoin had seen since the floodgates of direct crypto investing were opened to traditional investors via the spot ETFs in January. In that piece, I expressed skepticism over the long-term viability of Bitcoin Depot’s business model compared to Bitcoin miners who have more room to diversify and streamline operations using a big part of their existing assets. Also, Bitcoin Depot’s high 23% markup on transactions, considering the availability of cheaper alternatives, like Moonpay, for converting Bitcoin to cash (and vice versa) was a significant concern. While this stock isn't exactly the most appealing Bitcoin-related stock, and the business model seems not as viable as those of exchanges like Coinbase or miners like Marathon, BTM is still worth keeping on the radar. Excerpt from previous BTM coverage. company presentation For readers who aren't familiar with the company’s operations, Bitcoin Depot is a Bitcoin-focused company that owns and operates a network of Bitcoin kiosks (also called Bitcoin ATMs or BTMs) in North America. The company currently commands around 23% of the total U.S. Bitcoin ATM market share and an 8% market share in Canada. In addition to physical BTMs, Bitcoin Depot also offers seamless crypto-to-cash conversion services via mobile apps. Since my last coverage, Bitcoin Depot has added 2,300 BTMs to its fleet in the U.S., bringing the total number to 8,300 BTMs currently. Bitcoin Depot initially guided for 8,000 BTMs by the end of CY24, but surpassed that target since Q2 and now exceeds the 8,000 BTMs guidance by an additional 300 BTMs. Bitcoin Depot also has 2,000 BTMs in inventory which it aims to strategically deploy in the coming months. On the surface, this aggressive expansion of the Bitcoin ATM fleet appears promising, but how does it translate to accretive value for the company? There could be more to it than meets the eye, and risks that could linger for the foreseeable future. Highlights from Bitcoin Depot's Q3 Results Since the start of 2024, the impact of new legislation that imposed daily transaction limits on Bitcoin ATMs and a cap on the markup Bitcoin ATM operators can charge, in some U.S. states, has been a main sticking point for Bitcoin ATM operators. This has prompted new operational strategies and diversification of business. As part of business diversification efforts, Bitcoin Depot in Q2 announced a Bitcoin portfolio strategy , similar to that of MicroStrategy ( MSTR ). Bitcoin Depot has also engaged in fleet relocation in Q3, moving Bitcoin ATM fleets from areas with low transaction volume to areas with potential higher usage rates. However, fleet relocation didn't improve sales in Q3. According to Bitcoin Depot’s management, the full impact of fleet relocation might not be immediately visible in the quarterly result, as improvements take time to materialize. Total revenue in Q3 dropped both on a sequential and YoY basis. Q3 sales of $135.3 million were a 17% sequential decline and a 25% YoY decline. Adjusted non-GAAP EBITDA declined 33.9% YoY to $9.2 million in Q3. The new legislation has made it a tough operational environment for Bitcoin Depot this fiscal year. Over the past year, Bitcoin Depot has faced regulatory challenges in California, Connecticut, Vermont and Minnesota that has affected the business financially. This has created a year-over-year decline in revenue and EBITDA. However, today, we are much more prepared to address how states might approach regulating our industry. And this gives us a greater influence when regulation may be drafted. We believe 2024 is the low point in our business, and there is much more growth ahead. Brandon Mintz, CEO, during Q3 2024 conference call. While the CEO sees 2024 and the impact of the legislation as a low point in the company's business, and anticipates growth ahead, I believe the company’s operational challenges are a persistent impediment that poses risks to the long-term viability of the business in the U.S. The Bitcoin ATM legislation in California went into effect in January this year and other states have followed suit. In Minnesota , the daily cap on transactions at crypto ATMs is set at $2,000, while in Vermont, the limit is $1,000 daily. Both states’ legislation went into effect mid-2024. The legislation in Minnesota also stipulates a consumer reimbursement mandate for any loss of funds; this rule could potentially add more costs to ATM operators’ business OpeX. Though Bitcoin Depot's CEO spoke with optimism during the Q3 conference call , projecting “much more growth ahead,” I am of the view that this optimism might be premature, as more stringent regulation could still be passed, and more states with BTM presence could adopt laws that include transaction limits and a cap on markup. In California, for example, where the legislation has had the biggest impact on Bitcoin Depot’s operations so far, there is already a broader regulatory framework that will go into effect next year. The broader regulation called the Digital Financial Assets Law stipulates mandatory licensing requirements for BTM operators, which will take effect from July next year, and transaction fees cap of $5 or 15% max of the transaction value, which will take effect from January 1, 2026. coinatnradar.com Though Bitcoin Depot has expanded its business beyond the U.S. into new markets, commencing operations in Puerto Rico and planned launch in Australia in 2025, the U.S. remains the major hub for Bitcoin ATMs for now (the U.S. accounts for around 90% of global BTM installations) and most likely will be for the foreseeable future. Overseas expansion will likely not make up much for the operational hurdles caused by U.S. regulations that have been negatively impacting sales. Even outside the U.S., there will likely not be an easy room for growth for companies like Bitcoin Depot. For example, in the UK, regulators have long deemed Bitcoin ATMs illegal since 2022 and have not made any recent revision to that stance, and in most European countries, the same daily transaction cap exists for transactions at Bitcoin ATMs. Bitcoins ATMs are physical money transmitters; hence, as their popularity grows, national and state licensing and regulatory compliance for BTM operators doesn't come as a surprise. And as Bitcoin Depot’s core business revolves around its Bitcoin ATMs, thereby being heavily reliant on transaction and markup fees, regulations that impose transaction and markup caps directly threaten the company's revenue. Bitcoin Depot’s Dividend Strategy: A Questionable Move In the Q3 conference call, Bitcoin Depot's CEO announced a dividend payment strategy which, in all fairness, I consider as “window dressing.” Like I have highlighted earlier in this article, regulations that directly place a cap on transactions, markup and fees are a direct threat to Bitcoin Depot’s revenues. With the declining revenues and operational challenges, I don't think a dividend declaration is a financially prudent strategy. "We have been exploring with our Board the best way to utilize our cash to create the most value for shareholders, and we believe starting a cash dividend at some point in 2025 will allow shareholders to benefit. At this time, we are not aware of any other U.S. company whose primary business is in the cryptocurrency industry offering a dividend. - Brandon Mintz, CEO” Part of my concerns stems from the CEO’s own words: “we are not aware of any other U.S. company whose primary business is in the cryptocurrency industry offering a dividend.” There is a reason crypto-focused companies typically avoid dividend payments. I strongly believe that with the risks, volatility, and seasonality associated with crypto and crypto-focused businesses, investing in growth opportunities should be prioritized over dividend payment. Data by YCharts Data by YCharts While Bitcoin Depot generates enough cash from its operations and free cash flow remains positive (though showing some decline lately), it is worth pointing out that the company also currently has negative equity (liabilities exceed assets) and a negative debt-to-equity ratio at -2.71. This adds more layer of uncertainty to the long-term sustainability of the dividend payments. BTM Stock Insider Selling: A Red Flag for Investors? Investors who follow BTM closely know that there has been ongoing insider selling by CEO Brandon Mintz, who also controls over 50% of the company’s voting rights through his ownership of BT Assets. The CEO set up BT Assets in November 2023 and is the sole member of BT Assets, which controls 41,193,024 Class V shares. These Class V shares are convertible 1:1 into Class A shares, thus allowing the CEO to retain significant influence over the company’s voting rights. As such, Bitcoin Depot is effectively a “controlled company.” There have been one or two cases of substantial insider selling by the CEO in the past, and the timing of the sale raises eyebrows. There was a substantial sale of $5 million worth of BTM shares by the CEO in April at $1.72 per share. And a recent sale of 125,000 shares of Class A common stock for approximately $376,487 at a weighted average price of $3.0119 which is around the recent local top for the stock where the price peaked, raises questions about the timing of the sale. $5 million insider sale by the CEO on April 26, 2024 (insiderscreener.com) Takeaway Revisiting BTM after eight months, I lean towards reiterating a “hold” rating instead of a buy, despite the aggressive kiosk expansion Bitcoin Depot has embarked on since last coverage in March. BTM shows expansion of business operations, but there are also risks to the business’s long-term viability. Bitcoin Depot’s attempt to implement a dividend strategy, despite ongoing operational pressures and a negative equity position, raises questions about the company’s long-term financial standing. Despite declining revenues, BTM has surged by over 28% in one month. A closer look has shown that fundamentals haven't improved much for BTM; the recent price surge is mostly linked to Bitcoin's own rally since Donald Trump's victory in the U.S. elections, which has seen crypto stocks pick up momentum.
