Introduction: Bitcoin Group SE is the operator of bitcoin.de, a cryptocurrency exchange targeted at German speakers with more than 1 million users. The company claims that its exchange, bitcoin.de, is the largest crypto exchange in Germany. Bitcoin Group also owns a small investment bank focused on crypto-related investments and trading crypto for institutional and corporate clients. The company’s stock trades on German exchanges under the symbol ADE and OTC in the U.S. under the symbol BTGGF (in very small volume). Its website can be found here: https://bitcoingroup.com/de/

Summary

Bitcoin Group operates a highly-profitable cryptocurrency marketplace, holds significant (and increasing) crypto assets, and has no debt. It isn’t under investigation, based on some obscure island, or owned by unknown persons. Last year was its best year ever. Yet, it doesn’t have a valuation in the billions like Coinbase, FTX, Kraken, or Microstrategy…in fact, the market is barely giving any value to its crypto exchange at all. Although Bitcoin Group generated €14 million in EBITDA in the 1^st half of 2021 (up 127% year-over-year), its €170 million market cap roughly matches the value of its cash and crypto holdings on its balance sheet (excluding taxes). Just over a year ago, the firm’s market cap exceeded the value of its crypto and cash by more than €300 million. While it’s difficult to value the company, I think it’s easily worth €60/share, about 75% upside from the current price.

Reporting

Bitcoin Group SE reports on a half-year schedule and has not yet published its 2021 results, so the latest available financials are through June 2021. The company occasionally puts out press releases with some updates, typically to remind investors that it’s holding significant crypto. Bitcoin Group reported its first half 2021 results in late-September. Its Annual Report (in both German and English) is expected to be published in April. Last year, the company provided preliminary results in a press release in mid-March, so we may get some info soon.

Bitcoin Risk

Getting this out of the way: Bitcoin Group is highly exposed to bitcoin (and other crypto) prices. The company collects bitcoin as commissions, holds about €125 million worth of bitcoin at present, and trading volumes (and, therefore, commissions) on its exchange are much higher when bitcoin prices are volatile and interest in bitcoin is high (such as Q4 2017, Q1 2018, and Q1 2021). If you think crypto has no future, then this is not your investment. If, however, you think the recent weakness in crypto prices is temporary, then this may be a great time to buy.

Background/History

Based in Herford, Germany, Bitcoin Group consists of a crypto exchange, bitcoin.de, and futurum bank AG, a small investment bank. The company only has 27 employees, and overhead costs are low.

Frankfurt-based futurum bank AG began life as a brokerage in 1983. It provides investment banking services to small- and mid-sized companies. It was acquired by Bitcoin Group in 2018 for about €3 million. In 2020, bitcoin.de and futurum were merged, allowing Bitcoin Group to refer to itself as a “crypto bank” as it is both a crypto exchange and a regulated investment bank that can do prop trading, issue crypto products, custody assets, and operate crypto ATMs. It also adds credibility that most crypto exchanges worldwide do not have. While retail investors may not care about this, it does provide a possible advantage in attracting institutional clients, just as major U.S. investment banks have been looking to do. Bitcoin Group also owns 50% of a small financial services firm called Sineus Financial that provides compliance and legal work (results are not consolidated). This report will not spend much time on futurum and Sineus as they are primarily being used to support the development of bitcoin.de.

Information on futurum can be found here: https://www.futurumbank.com/

On this site, you can find a 2019 Annual Report (in both English and German) issued by the bank (before the merger). Futurum had €4 million in assets at the end of 2019, a year in which it reported a small (<€100K) loss.

Bitcoin.de traces its history way back to the early days of bitcoin (2011) and, to be honest, its website appears to have changed little since then: https://www.bitcoin.de/en/btceur/market

Bitcoin.de allows trading in bitcoin, ether (added in 2017), and five other cryptos. There are plans to add more cryptos on a regular basis. The company had 1 million active users at the end of June 2021, a 13% increase from June 2020. Based on the rate of user growth, there are currently about 1.1 million users. In the first half of 2021, the company recorded about €19 in revenue per user, as shown here:

Bitcoin.de Customer Data

Source:S Company reports, my estimates.

As seen in the table above, the number of users and revenue per user rises much faster when crypto prices are rising, and interest is high, as was the case last year. Bitcoin Group reached its 2021 year-end goal of 1 million users six months early, and revenue per user (by my calculation) jumped 160%.

Bitcoin.de has a different model than many of the hundreds of other crypto exchanges, acting as more of a marketplace. There are three different ways to trade on bitcoin.de: peer-to-peer, crypto-to-crypto, and directly with futurum bank. In the peer-to-peer transactions (most of the site’s volume), money is transferred directly from a buyer’s bank account to a seller’s bank account and then the crypto is transferred. This means that buyers do not need to deposit money with bitcoin.de and that sellers receive the cash directly in their bank accounts. Bitcoin.de charges a fee of 0.5% to each side, with the commission being collected in crypto. For example, if someone buys 10 BTC, 9.9 BTC is transferred to the client and the other 0.1 BTC covers the commission. Thus, bitcoin.de is acting as a facilitator of the trades and a place to store crypto safely. As at Coinbase and other exchanges, nearly all (98%) of the crypto stored with bitcoin.de is held in cold storage wallets controlled by the company, which limits the risk of a hack.

There are both good and bad aspects of the peer-to-peer model. Some people like that they don’t have to deposit money with bitcoin.de as this eliminates the risk that the exchange will suddenly disappear and take their cash (as has happened elsewhere). Unfortunately, though, as bitcoin.de has fewer users than the largest exchanges, the bid/ask spreads can be wide. Also, transfers between bank accounts will take one or more days to clear. To get around the latter problem, most bitcoin.de users deposit money with a German online bank called Fidor. Going back to 2013, bitcoin.de has an agreement with Fidor that allows crypto trades to clear instantly, as at other exchanges. This service doesn’t cost extra for bitcoin.de clients (the company pays a small commission to Fidor) and is safer than depositing money with a crypto exchange. More information on Fidor can be found here: https://www.fidor.de/investment/krypto

In December, bitcoin.de enabled crypto-to-crypto trading; for example, buying ETH with BTC. As there is no bank transaction needed (bitcoin.de controls the wallets), these trades clear within seconds. The firm claims to be the first exchange in Germany with this capability.

The third way to trade crypto on bitcoin.de is through a marketplace operated by futurum bank. Bitcoin.de is designed for retail traders. In 2020, Bitcoin Group has one client (an institution, presumably) that accounted for 13% of its revenue, but most of its revenue consists of commissions on retail crypto trades. To attract corporate and institutional clients, futurum (which has long traded stocks and bonds) has established a trading desk to become a market maker for cryptos. Futurum is also trying to get more involved in financing of crypto-related companies (bonds, IPOs, etc.). Bitcoin Group sees a big opportunity here as Germany has recently made it legal for financial institutions to hold crypto, as discussed here: https://www.bloomberg.com/news/articles/2021-07-30/germany-to-allow-institutional-funds-to-hold-up-to-20-in-crypto

And here: https://www.coindesk.com/markets/2021/08/06/german-crypto-startups-welcome-415b-spezialfonds-law-even-if-the-impact-is-small-so-far/

Bitcoin.de has lower volume and fewer trading pairs than the large multinational exchanges. However, it is regulated by BaFin (Germany’s financial regulator), is based on euros, and has German-speaking customer support, so it may appeal to some Germans who are just looking for a native place to buy bitcoin, ether, or a few others. Over time, bitcoin.de could have an advantage with German institutions looking to enter the market. Bitcoin Group’s management has suggested it could have 10%-20% of Germany’s crypto market share in 2-3 years, but I have no reliable figures on its current share.

Stock Price Movement

Bitcoin Group’s stock price hit its all-time high of €86.19 during the onset of bitcoin mania in November 2017. Like the price of bitcoin itself, Bitcoin Group’s stock price has since had big declines and big rallies. For example, between October and December 2020, the price skyrocketed about 250% to just short of its all-time high. Over the past three months, the stock price has dropped nearly 40% (to €34 from €56) as crypto prices have been trending downwards. Generally, the implied value of bitcoin.de declines and expands with bitcoin prices, possibly because investors expect prices to continue to fall/rise. About 25% of Bitcoin Group’s 5 million outstanding shares are owned by a firm called Priority AG, with the rest in the free float.

Holdings / Valuation

Bitcoin Group is so cheap that shareholders are practically getting bitcoin.de for free. The company currently holds just over €150 million worth of cryptocurrencies (the value changes constantly), of which bitcoin and ether account for 98% of the total. I don’t know the exact amount of the company’s crypto holdings because there hasn’t been any update since September, but it should be slightly higher. Typically, about 30%-40% of Bitcoin Group’s EBIT is remains in crypto (commissions are collected in crypto), so its crypto holdings have probably risen by €2-3 million in the past six months.

Bitcoin Group has exactly 5 million shares outstanding, so its crypto holdings are just over €30/share. However, the company would face a large tax bill if its crypto was converted to euros as its cost basis is only €18 million (some of the bitcoin has been held since 2013). So, assuming a 30% tax rate, the net value of its crypto is about €22.50/share. Bitcoin Group also had more than €3.50/share in cash at last report (June 2021), so the value of its cash and (net) crypto is about €26/share. Thus, at the current share price of about €34, its EV adjusted for its cash and (net) crypto is roughly €40 million, or only about €40 per user. At times, the implied value of bitcoin.de has been much higher. For example, at the end of 2020, Bitcoin Group had a market cap of about €400 million with crypto holdings (adjusted for deferred taxes) and cash valued at about €79 million, for an implied bitcoin.de value of more than €300 million. There’s no obvious reason that the value of bitcoin.de has declined by more than €250 million over the past 14 months except hype and the recent downtrend in crypto prices. On operational basis, nearly everything has improved. Anyway, here’s a summary of the company’s crypto holdings (as of last report):

Bitcoin Group’s Crypto Holdings and Valuation

Source: Company reports, my estimates. 

Income Statement / Estimates

Bitcoin Group is a highly profitable, scalable business with most of its incremental revenue dropping to the bottom line. The 1^st half of 2021 was a great period for both crypto trading and Bitcoin Group’s results – in fact, its revenue (€17. million) and EPS (€2.03) for the period exceeded all of 2020. Its 1^st half EBITDA margin was 81.6%, its EBIT margin was 79.3%, and its net profit margin was 57.5%. Bitcoin Group achieves these high margins because, with just 27 employees, its overhead expenses are low and almost completely fixed. One exception to this is that, although bitcoin.de does little in the way of traditional marketing, its operating expenses tend to rise in high volume trading periods because it offers an affiliate program that rewards people for inviting new users (10% commission sharing for 6 months).

Blockchain network fees are included in operating expenses but are passed on to clients.

Income Statement

Source: Company reports, my estimates.

As seen above, revaluations of Bitcoin Group’s crypto holdings have a big impact on its bottom-line results. Under IFRS, the company must revalue its crypto holdings based on price changes. This had a negative impact in 2018 but a positive impact in the following two years. In the table above, I have adjusted the net profit, EBIT, and EPS for the changes in crypto valuations. For example, Bitcoin Group reported €0.31 in EPS in 2018, but this would have been €1.10 without the crypto effect. Conversely, its 2019 EPS drops to €0.34 from the reported €0.43 when adjusted for crypto gains, while its 2020 EPS drops to €1.47 from the reported €1.90. Bitcoin Group did not report a revaluation in the 1^st half of 2021 and I do not make any assumption going forward. Due to the revaluation impact, it is probably easier to focus on EBITDA margins.

As they are based on trading commissions, Bitcoin Group’s revenues are highly volatile and dependent on interest in crypto trading (especially in Germany). However, even in slow periods, its user base has continued to grow, and it has been remained profitable. In 2019, its revenue dropped 44% from 2018’s level because crypto prices were low, and volatility was limited. Consequently, its EBITDA margin fell to 41.2% from 76.4%. Then, in 2020, interest in crypto picked up, revenue jumped 138.7%, and its EBITDA margin recovered to 70.2%. As seen above, Bitcoin Group achieved this result despite a large (one-time) increase in operating expenses in the year owing to the consolidation of futurum bank’s results and some integration expenses.

Bitcoin Group has yet to report its 2021 full-year numbers. Clearly, the market doesn’t expect it to report more than €4.00 in EPS (as it was on track to do through the 1^st half). The only guidance provided by the company was that its revenue and EBITDA would rise in the low- to mid-double-digit millions from 2020’s results. This guidance implies 2021 revenue of €25-€30 million and EBITDA of €20.5-€25.5 million. However, I assume there was a big drop off in results in the 2^nd half of 2021 as the 1^st half (especially Q1) was an exceptionally strong period for crypto trading with the NFT hype and stronger prices. I assume revenue in the 2^nd half dropped to €7.3 million from the 1^st-half’s €17.7 million, resulting in full-year revenue of €25 million, the very bottom of the implied guidance. I don’t have much to go on, but I think this is a conservative estimate as it assumes revenue fell 17% in the 2^nd half of 2022 vs. the 2^nd half of 2021 even though the user base of bitcoin.de was higher and crypto prices soared in October 2021. My EBITDA estimate for 2021 is €19.3 million, lower than the low-end of the company’s implied guidance. My 2021 EPS estimate is €2.65, implying a large drop in 2^nd half earnings.

For 2022, I estimate revenue of €27 million, EBITDA of €21.1 million (75.8% margin), and EPS of €2.90. My 8% revenue growth estimate is roughly equal to expected percentage increase in the user base. If crypto prices remain weak all year, my revenue estimate will probably be high. If there is a big rally at some point, my estimate could be low.

Balance Sheet

Bitcoin Group has no long-term debt. At the end of June 2021, it had €17.6 million in cash, up from €12 million six months earlier. The most important items on the balance sheet are its cryptocurrencies and deferred taxes on cryptocurrencies. As under GAAP, cryptocurrencies are treated as intangible assets under IFRS. At the end of June, Bitcoin Group reported €131.6 million in crypto and deferred taxes of €34.8 million. The value of the company’s crypto assets will rise or fall with market prices.

Balance Sheet

Source: Company reports.

Cash Flow Statement

Bitcoin Group reported €14 million in EBIT in the 1^st half of 2021 and added €5.7 million to its crypto holdings. Generally, its target is 30% crypto/70% cash, but this can be changed depending on cash needs. Conversions from crypto to euros are done daily to avoid overnight holding and paying taxes on crypto (which would be valued for tax purposes under FIFO). Bitcoin Group will use its cash to fund development of the business and, possibly, acquisitions of companies with complementary technology. Given its low share price, I would like to see the company use cash for repurchases. However, the strategy of holding crypto would obviously work out if crypto prices rally (again).

Cash Flow Statement

Source: Company reports.

Valuation

Valuing Bitcoin Group is a difficult exercise given its exposure to bitcoin prices. If the price of bitcoin rises to €100K, this stock is going way higher. If it goes to €10K, it’s going lower. Bitcoin Group’s historical valuations are not very helpful: At times, the stock has traded at both small discounts and large premiums to its crypto and cash holdings. Bitcoin Group paid for a research report (available on its website) that suggested a €120 price target based on a DCF model assuming bitcoin prices follow the stock-to-flow model. At present, the price of bitcoin is below the stock-to-flow expected price. I would rather not make any prediction based on bitcoin prices in future years, so I will use an 8x EBITDA valuation. I estimate Bitcoin Group’s 2022 EBITDA at €21.1 million, so an 8x multiple on this would suggest a valuation of €169 million, or about €34/share. Adding the value of the company’s cash and crypto (adjusted for deferred taxes) of about €26/share to this amount yields a target of €60/share, or about 75% upside. This isn’t absurd: Bitcoin Group traded above €60/share as recently as last April. I don’t make any aggressive assumptions about institutional adoption of crypto investments in Germany, which could be a major growth driver for the company in the long-term.

Risks

·         Bitcoin (and other crypto) prices. Declining crypto prices result in less value for its holdings and less revenue for bitcoin.de. Of course, it can also work the other way.

·         There are 100s (1,000s?) of crypto exchanges in the world. There are no real barriers to entry. Moreover, there are defi projects that may make exchanges obsolete. However, Bitcoin Group is different than most others in that it is a regulated financial institution. Also, its status as a company native to Germany may make it more appealing to Germans.

·         Bitcoin Group is a small company with limited technology. Bitcoin.de doesn’t have a lot of services that the larger exchanges are rolling out, such as ETH staking, NFT exchanges, and lending.

·         As with all exchanges, there’s risks of hacks or thefts or some other terrible thing happening that blows up bicoin.de. Unlike most others, its wallets are audited by a third party once per year, which should provide some confidence to users and keep the management honest. Also, most of its crypto holdings are in cold storage, making a large-scale hack unlikely.

·         Regulation (or outright ban) of crypto.

·         Futurum is a licensed bank that must follow banking laws.

·         Bitcoin Group does some trading of its own through futurum bank, so there is some risk of loss.

·         Futurum is exposed (in a small way) to economic conditions in Germany.

·         There’s still a pandemic.

Summary

Bitcoin Group didn’t run a Super Bowl ad and it isn’t valued in the billions. It isn’t doing any bitcoin mining, doesn’t sell NFTs, and it isn’t invested in questionable defi projects. Instead, it’s an extremely scalable business with barely more than two dozen employees that operates a long-standing crypto exchange for German speakers. Its EBITDA margins are 70%+ and it had triple-digit revenue growth in the 1^st half of 2021. The stock has dropped with crypto prices in recent weeks, but I think it’s worth owning until (if?) the next upcycle in prices comes around. I think a price target of €60/share is reasonable, but it could go much higher. In the long run, it’s a play on crypto adoption among German financial firms and in Germany in general.

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice, nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author has a position in this stock and may trade this stock.