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Over the last decade, crypto start-ups in the virtual asset industry have been able to generate the primary cash flow via conducting Initial Coin Offerings, whereas new exchanges in the sector would file IEOs to bolster their funding.
Investors’ interest had also surged over the years but in order to enter larger capital markets, a move into going public was necessary. However, it was easier said than done.
Bitmain and Canaan Creative had filed for an IPO in Hong Kong earlier this year, but the two failed to register developments. The issues came down to regulatory and policy concerns, which has been a major hurdle. There were potential candidates in the industry backed by Digital Currency Group and Messari.io recently discussed how these institutions will be valued in the public market.
In their official medium blog, Jack Purdy, Research Analyst at Messari, stated that the companies in the discussion were Grayscale, Genesis, and CoinDesk and their worth was evaluated via SOTP analysis. Sum-of-the-part or SOTP analyzes the breakdown of a business into segments, derivation of value for each segment and then adding these numbers up to acquire a whole value. In order to draw a valid comparison to other public companies, Purdy stated,
“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.”
Grayscale Investment, an Asset Under Management [AUM] company had over $2.5o billion of assets under their name. The charging fee put forward by Grayscale was around 2-3 percent on each individual AUM fund. Organizations like Hamilton Lane and Victory Capital have a similar business structure to Grayscale, where revenues were tied to fees charged from total AUM.
On comparison, their revenue multiples came between 7x-12x, whereas Grayscale’s revenue multiple was around 10x-15x, Grayscale was worth relatively more than these existing companies in the public market.
A similar situation was seen with Genesis Capital. Genesis, the largest OTC lending firm in the crypto space, indicated in their quarterly report that their lending activity in Q2’19 was around $452 million in outstanding loans.
Comparing similar lending desks in both crypto and traditional markets, estimated return on loans, based on the interest charged, was around 5 percent, which was equivalent to roughly around $22.6 million in annual revenue.
Genesis’s performance was compared to similar traditional lending platforms such as Ares Capital, Golub Capital and it was revealed that their revenue multiples were between 6x and 9x. Compared to Genesis, the crypto OTC desk exhibited around 7.5x-10x in revenue returns. The estimated valuation compared was again toppled by the crypto organization, outperforming $169.5 million to $226 million.
The comparative analysis showed that crypto companies can be worth much more in public markets but he mentioned that the valuation of DCG was highly depended on the price of Bitcoin. He stated,
“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.”