EFTA00605996.pdf

WEDBUSH i ll\ 55(. 1 1. '5 SI.N 1.,(55( IS( '0 \IV. NORk ItOSION II II %I.° I SI I I A I' 0 I. I 5 I %I II 5% I I, I. I. s LAI Equity Research I I. E Bitcoin Investment Trust (GBTC) November 4, 2015 Price Renewed Interest by Large Financial Institutions and Media; Reiterating OUTPERFORM and Raising BTC Price Target to $52.00 $600 Rating • We believe bitcoin and its associated blockchain technology have the OUTPERFORM potential to disrupt the existing financial infrastructure over the next several years, and believe the value of the bitcoin currency (BTC) will benefit from this trend. Please see our GBTC initiation report here. 12-Month Price Target • We believe the value of bitcoin has started moving up recently as broad $60 (from $40) positive media coverage (page 3) has started to sway sentiment. • Large financial institutions continue to invest and investigate uses of bitcoin Gil Luria and its underlying technologies (e.g. Blockchain) at an increasing pace (p4). • We believe that Blockchain is to Bitcoin as Intranet is to Internet. We believe there may be some applications that narrowly use a distributed ledger without a valuable native token, but those will end up being a small part of the solutions the technology creates. We believe the reason financial institutions are insisting on -Blockchain not Bitcoin" is for internal and regulatory compliance. We expect that even the narrow solutions leveraging only a distributed ledger will end up being Company Information anchored on the bitcoin blockchain sooner or later. Shares Outst (M) 1.382.0 • We continue to observe consistent transaction growth, especially from Market Cap (B) $71.8 applications such as remittance and multi-signature (pages 5.6). We are also 52-Wk Range $21.22 - $55.00 witnessing an increase in payment fees over time, which should help supplant bitcoin issuing as the revenue source for the transaction processors running the bitcoin network. Shares Oust - BTC(M) 14,800 • We detail our valuation framework on pages 7-9 to arrive at our target of Market Cap - BTC (B) $7,152 $600/BTC ($60/GBTC) - we employ a supply/demand methodology based on utilization of future applications. With bitcoin supply mostly predetermined, we estimate bitcoin applications' large and growing addressable market, anticipate an inflection point of bitcoin application adoption 5-10 years out and apply a high Company Description discount rate to account for uncertainty. The Bitcoin Investment Trust (BIT) is a • Reiterate OUTPERFORM rating and raising our GBTC price target to $60 private, open-ended trust that is invested (equivalent to $600/BTC) from $40 based on less conservative supply exclusively in bitcoin and derives its value assumptions. The main change to our model is a higher proportion of dormant or solely from the price of bitcoin. BIT was held-for-investment bitcoin. launched in 2013 by Grayscale Investments, a wholly-owned subsidiary of • Risks to our price target include the fact that BTC could very well go to zero due to Digital Currency Group. lack of cash flow, increased government regulations, lack of consumer adoption, rise of superior alternative crypto currency, failure of the protocol, and cyber hacks. Financial Technology Source: Thomson Reuters Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 10 of this report for analyst certification and important disclosure information. EFTA00605996  WEDBUSH Risks to Bitcoin Future risks that may face bitcoins, the Shares' underlying asset. may be: • Bitcoin does not generate any cash flow. • Changes in global bitcoin demand, by changing levels of acceptance by merchants and consumers, may adversely affect market pricing of bitcoins. • Cyber theft of bitcoins by or from online bitcoin wallet providers, or theft from individual bitcoin wallets. • Monetary policies of central banks and governments may impose risk by trade restriction or currency revaluation, possibly having adverse effects on bitcoin market pricing. • Increased competition from other payment technologies, services, or forms of crypto currency. • The maintenance and development of the open-source software protocol of the Bitcoin Network. Risks to GBTC Shares Future risks that may face the Trust, and its Shares. may be: • Regulatory changes that may change the way BIT operates in regards to the way the Shares are traded on its designated exchange. • Countries curtailing or outlawing trading and/or ownership of bitcoins. • Additional expenses incurred by the Trust due to possible future regulatory compliance changes, though the Trust holds the ability to terminate should these expenses be disadvantageous to investors. • Due to the Shares' direct relationship to historically volatile bitcoin market prices, the value of the shares may fluctuate. • BIT is a passive investment vehicle: therefore it is not actively managed and is susceptible to losses that may have been mitigated by active trading. Disclosures At the time of publication, Wedbush Securities owns a nominal amount of BTC and has invested in bitcoin-related companies. Other mandatory disclosures appear in the back of the report. Gil Luria Bitcoln Investment Trust 12 EFTA00605997  WEDBUSH Figure 1: The Economist Print Edition 9610(.: A 124AGESIICIAL RE:PORTON (POMBA 03>and twins0 Males pail The twin %Silo the and el bent Economist These ever-aeathe aCCOuntiniS MiSka Lan tIN ISM b Ceriottec She am typerwedaw The trust machine How the technology behind bitcoin could change the world e a a ft ` 4144% k st, Ai er r.r /4 Source: Wedbush Securities. Inc. Figure 2: Recent Coverage Bloomberg WORLD CONOfrAtt FoRuni AGENDA mir / 41Be Midi Why Bitet4iilk3 4 Slue Then • tromp' •••=ommisammt Forbes [21 RE !be ;Nein Nark Ziwit5 I-WM' UPI ‘. We lkslaliestot - %DI qt,11truthIUD red:sake 011V11% ilk 10 SEIM .SmIerirthidlaallimimilartirwaliei,•— nen 111M ro• pos....4 sass,. trees.. w.m....,../..... ..wawsamnsw.m _ T _ 4 - -• µ _ • ^ rata -- Oa V_ a' -a U.- - Source: Wedbush Securities, Inc. Gil Luria Ellteoln Investment Trust 13 EFTA00605998  WEDBUSH Figure 3: Financial Institutions and Other Corporate Adoption of Bitcoin and Blockchain Companies inventing in Blockchain Technole Andreessen tionossiu 043VA Satiety Ventures Greylock Patinas Capital One Gamma Catalyst Partners Mosta Ventures USAA Visa Bain Capital %/animas CIBC Firstftbrk Capital Mastercard New York Lite Novel TNT Oak HCIFT RRE Ventures Solon Mack Captal Transamerica Ventures Goldman Sachs NYSE NASDAQ UBS Cid Barclays Wecturh CME Investigating Blockchain Use Cases BNY !Arlon IBM US Federal Re Samsung Santander PayPal/Bnuntree Stripe NCR Square Intuit First Data Global Payments Toshiba. VisualTouch Companies scceptmq Sitcom') payments Microsoft Del Untied Way Wikipedia WoMpress Expodia Dish Overstock American Red Cross Time Magazine Monila Nenvegg Redd, Soundcloud Zynga Subway (very few) Vrgh Galactic Sacramenlo Kings TigerDirect Chicago Sun-limes OKCupid Rakuferi (via SLOSicliasy Rakmen Super Lo9stics) OpenSSL Khan Academy Source: Wedbush Securities, Inc. Gil Luria Bitcoin Investment Trust i 4 EFTA00605999  WEDBUSH Figure 4: Monthly Bitcoin Transactions 5,000,000.00 4,000,000.00 3,000,000.00 2,000,000.00 1,000,000.00 0.00 uni1)11111111111 IIll ,t k i cct 2. O m cct —ogc—O-c-O U1 Ill Ill Ill Source: BIockchain.info, Wedbush Securities, Inc. Figure 5: Pantera Capital Portfolio Companies Growth Rates Blockchaln Cross-Border Payments Volume 7x VTD, BM Payments II x YTD 2,000 1.600 1.200 800 400 0 C mpa y — Company 2 Company 3 Index (Companies 1-3) Source: Pantera Capital, Wedbush Securities, Inc. Gil Luria BIteoln Investment Trust 15 EFTA00606000  WEDBUSH Figure 6: BitGo Transaction Volume BitGo's Transaction Volume IS in MTh 2,000 :1,600 :1,200 0 800 u 400 I 0 Q2'15 Source: BitGo. Wedbush Securities. Inc. Figure 7: Average Fee per Transaction I 0.0003 Average Fee per Transaction - 7 day average 0.00025 0.0002 0.00015 0.0001 0.00005 0 \\.t• %.t.la S V.. \N \yer s$ est, S S 7 0' P.2 4° 9 19 1s tg2 e Source: Wedbush Securities. Inc. Gil Luria ITheoln Investment Trust 16 EFTA00606001  WEDBUSH Valuation Our approach is to use a commodity-like valuation that values each BTC as a 'packet' in limited supply that fuels the bitcoin network. The more the bitcoin network is utilized for current and future applications, the more demand for the packet. By aggregating the utilization of the various applications (Figure 1) we arrive at our $600 BTC price target which translates to $60 per share of GBTC. We start with the supply which is predetermined by the bitcoin software to create new 'shares" in order to compensate the network node operators (i.e. miners). Of those, the relevant portion is the portion neither dormant nor held for investment. Those bitcoin cannot support economic activity and are therefore excluded from the relevant supply. We expect that proportion to fall in proportion as economic activity picks up and the number of bitcoin available to support applications to grow. We then look at the four current applications for bitcoin — online payments, remittance, micro transactions and "banking" for the unbanked — as well as a catch all other category that includes black market activity and any other future application such as machine to machine (Internet of Things) and anchoring other blockchains. For each of these applications we attempt to forecast demand by looking at the total addressable volumes and potential share bitcoin can achieve over the next 10 years. For micro transactions we use the total intemet advertising market as a proxy for the size of the opportunity, considering the possibility direct monetization of content will help supplant the intemet advertising model. We assume in our forecasts 10.20% bitcoin penetration for all these various opportunities by 2025. In order to assess the amount of bitcoin required to support this level of activity we apply different levels of velocity. For example, if a consumer replenishes their bitcoin wallet every month that would equate to 12x annual velocity for their bitcoin. We apply velocity levels ranging from 5.5 for unbanked and other applications (current velocity of bitcoin) and 12 times for payments and remittance. The ultimate calculation takes the total bitcoin required to support these applications in 2025 divided by the number of bitcoin available for economic activity discounted to the current period by a discount rate. We use a very high 40% discount rate to illustrate the uncertainty regarding these outcomes ten years out. Figure 8: Bitcoin Supply Largely Predetermined 2014A 2015E 2020E 2025E Total Bitcoin in Circulation (End of Year) 13.125.000 15.000.000 18.410,000 20.343.750 % of total 71.43% 87.67% 96.88% Held for investment or Dormant % 50% 50% 41% 33% Held as Working Capital % 50% 50% 60% 67% Bitcoin Available for Transactions 6.562.500 7.500.000 10.953,950 Ifr1=111 Source: Wedbush Securities. Inc. Figure 9: Large and Growing Addressable Market S Billion 2014A 2015E 2020E 2025E Online Payments 1.500 1.725 3,379 5.955 Remittances 435 457 583 744 Micro Transactions 540 567 724 924 Unbanked 4,305 4.435 5,141 5.960 Other 1.829 1.902 2.314 2.816 Total 8,609 9.086 12,141 16.398 Growth Rates Online Payments 15% 12% 12% Remittances 5% 5% 5% Micro Transactions 5% 5% 5% Unbanked 3% 3% 3% Other 4% 4% 4% Source: Wedbush Securities. Inc. Gil Luria Bitcoin Investment Trust 7 EFTA00606002  WEDBUSH Figure 10: Expect Market Share "Hockey Stick" 5-10 Years Out Bitcoin Share Online Payments 0.02% 0.04% 1.35% 10.00% Remittances 0.01% 0.03% 2.16% 20.00% Micro Transactions 0.01% 0.03% 2.16% 20.00% Unbanked 0.001% 0.003% 0.73% 10.00% Other 0.01% 0.02% 0.64% 10.00% Capacity Supported by Bitcoin Online Payments $ 0.32 S 0.7 $ 45.6 $ 595.5 Remittances $ 0.04 $ 0.1 $ 12.6 $ 148.8 Micro Transactions $ 0.05 $ 0.2 $ 15.6 $ 184.7 Unbanked $ 0.04 $ 0.1 $ 37.5 $ 596.0 Other $ 0.18 $ 0.4 $ 14.8 $ 281.6 Total $ 0.64 $ 1.5 $ 126.1 $ 1.806.6 Assumed Annual Velocity Online Payments 12 12 12 12 Remittances 12 12 12 12 Micro Transactions 12 12 12 12 Unbanked 6 6 6 6 Other 6 6 6 6 Bitcoin Monetray Base Required Online Payments $ 0.03 $ 0.06 $ 3.80 $ 49.63 Remittances $ 0.00 $ 0.01 $ 1.05 $ 12.40 Micro Transactions $ 0.00 $ 0.01 $ 1.30 $ 15.39 Unbanked $ 0.01 S 0.02 $ 6.81 $ 108.36 Other $ 0.03 S 0.07 $ 2.69 S 51.19 Total BTC Monetary Base Required S 0.08 S 0.18 S 15.66 S 236.97 Source: Wedbush Securities. Inc. Figure 11: High Discount Rate to Account for Uncertainty Year 0 5 10 Bitcoin S Monetary Base Required Bltcolns Available for Transactions $12 $24 $1,429 S17.473 BTC Price $462 11/4/2015 Excess Value Based on Future Demand $450 PV SUSI:VE(7C $604 Discount Rate 40% Source: Wedbush Securities. Inc. Gil Luria Bitcoin Investment Trust 18 EFTA00606003  WEDBUSH Figure 12: Full Valuation Framework 2014A 2015E 2016E 2017E 2016E 20196 2020E 2021E 2022E 2023E 202E 2025E rønt Atcan in Orculmixn <End 01 Yeorl I 12$ COO 1 ,, . , . 18.025400 10656.022 17237.030 17.916000 18.410.022 18.725.003 19.041600 19.357.002 1907.6® 20.343.760 5.00081 7143% 78.31% 79.31% 8232% 8532% 0737% 89.13% 9087% 92.18% 93.75% 9688% Hee br kneetmeol og Conner4% 50% 50% 45% K% 44% 42% 41% 39% 38% 36% 35% 33% Heem Workeg Cephil % 50% .9'./., 52% 51% 56% 69% EO% 01% 63% 64% 06% 07% °konkabelt, b Tricesarre 8.582.500 7.500.00 0.333.000 8.994240 9080.720 14392.400 10.9531150 11.422.250 11.900.625 12.388.480 12936.313 13.562563 811on 2014A mee 20141 20111 201$8 20105 20201 20211 202211 2023E 202E 20261 0011n4 Po)~4. 1.500 1.725 1.964 2.261 2.024 3.017 3.379 3.765 4239 4,747 5.317 5.956 Eend 435 467 480 5:4 520 565 563 612 643 675 709 744 Micro Transactons 540 567 545 825 656 en 724 760 796 830 880 924 unbanho4 4.305 4835 4.568 9766 41156 4.9* 5.141 5295 5.454 5.618 5.795 5360 Other 1.829 1$02 1.978 2.067 2.140 2225 2.314 2407 2.503 2.803 2.707 2.818 C62/9329~ OnnoPaIngis 15% 15% 15% 15% 15% 12% 12% 12% 12% 12% 12% gemme-ces 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% tam Tronsocions 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Vnben144 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% On.r 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 20C4103bar$ OrdnePareres 0.02% 901% 900% 0.17% 0.34% 0.67% 1.35% 2.70% 5.39% 7.0D% 9.00% 1000% Reennwscos 401% 0.03% 0.09% 0.27% 0.54% 1.08% 2.16% 4.32% 6.64% 1728% 18.50% 2000% 1.8go Trernations 0.01% 00% 0.09% 017% 0.54% 1.08% 2.14% 4.32% AM% 17.28% 18.50% 20 0% uraan1.44 0401% 0.003% 0.01% 0.03% 0.08% 024% 0.73% 1.46% 2.92% 5.83% 7.50% 1000% OP/. 0.01% 902% 0.04% 0.08% 0.16% 032% 0.64% 1.28% 156% 5.12% 7.50% 1000% C/99011. Suppol9:00/ &kon oranoPaynents $ 0.32 $ 0.7 $ 1.7 $ 38 5 88 $ 20.3 $ 456 5 102.1 $ 2236 $ 3323 $ 478.5 $ 5968 Remiltrces $ 0.04 $ «1 3 0.4 5 14 5 20 5 00 5 126 5 28,4 S 654 5 1166 5 131.1 S 148,8 Nicn> Tramacions $ 0.05 5 02 5 0.5 $ 1.7 $ 3.5 $ 7.4 $ 15.6 5 328 $ 669 $ 14413 $ 142.7 $ 184.2 Vrbetand $ 0.01 $ 0.1 $ 0.4 5 13 5 3$ 5 121 5 376 5 772 5 1500 5 3276 5 4340 5 330.0 OM« $ 0,10$ 018 s 0.40 0.4 f 0,0$ ).13 f 1,65 .6 $ 344 f i.t $ 6 14.85 15 $ 30,0$ 0.8 6 64,5$ 111 1 133,3$ 8.3 Lse3.1 203,1 $ TM. $ 044 $ 1.5 5 3,8 5 98 5 22.8 5 S1.0 5 1281 5 2892 5 6711.2 5 1.0546 5 1.409.4 5 124:11.11 Amurnm Arno,' Velwti CvanoPaynals. 12 12 12 12 12 12 12 12 12 12 12 12 Renenes 12 12 12 12 12 12 12 12 12 12 12 11 Mao itamacions 12 12 12 12 12 12 12 12 12 12 12 12 1.kben1.4.4 6 4 6 4 6 6 6 6 6 4 6 6 CM« 6 6 6 4 6 6 6 6 6 6 6 6 ercøn lltaxaQv Base ~0 «nlne Parri8 0.03 f 006 014 f 032 014 1.59 $ 389 8.Ø 1905 5 2709 39.88 4963 ficinnino5 0.00 001 004 $ «11 024 050 $ 1115 2.20 463 S 972 10.92 12.40 48,0 TiernacIons 0.00 5 001 0.04 5 014 0.80 0.62 5 120 2.74 674 $ 12* 13.56 1639 trbonted 0.01 f 002 0.07 $ 023 0.71 221 $ 681 54.61 2692 S 5987 78.90 10826 0166. 0.03 3 007 014 $ 030 002 1.29 5 209 51/0 1165 5 2423 38.92 51.19 Total BTC 116/01ory Ba* R4.244140 008 $ 0.18 0.44 $ 1.10 2.61 6.31 $ 15.5 33.00 69.99 5 13121 180.18 23637 2 3 4 6 8 9 10 Bacoln 5 Morwary Base RttrIlf4.71 114coins Anaal» br Tramaakon5 512 524 553 5123 $269 5608 51829 $2896 $5.811 510.758 $13.973 M!!! BTC Pno6 5462 11140015 E744,34 Wit., 0490 0, 4440JeCronti $450 PV 54.160.11TC C. present vaiun of Se poce pre 131C requmed 10 support the expert«. level el econonvA acermy in 7023 1:44444•4 Rát0 40% Source: Wedbush Securities, Inc. Gil Lucia Blteoln Investment Trust i 9 EFTA00606004  WEDBUSH Analyst Biography Gil Luria is a Managing Director, Equity Research. covering Financial Technology stocks at Wedbush Securities. He joined Wedbush in 2005 and was previously at Sanford C. Bernstein covering large U.S. telecommunications companies. Prior to that he was a Manager with Deloitte Consulting focused on telecommunications companies. Mr. Luria holds a B.A. in Economics from Hebrew University and an M.B.A. from Columbia Business School. Gil's Edge: Gil relies on bottom-up fundamental analysis building on his deep understanding of technology and its implications for his companies. Analyst Certification I. Gil Luria, Aaron Turner, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report. Disclosure intonation regarding historical ratings and price targets is available at Investment Rating System: Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst's (or the analysts team) coverage universe over the next 6-12 months. Neutral: Expect the total retum of the stock to perform in-line with the median total retum of the analysts (or the analysts team) coverage universe over the next 6-12 months. Underperform: Expect the total retum of the stock to underperform relative to the median total retum of the analysts (or the analyst's team) coverage universe over the next 6.12 months. The Investment Ratings are based on the expected performance of a stock (based on anticipated total retum to price target) relative to the other stocks in the analysts coverage universe (or the analysts team coverage).* Rating Distribution Investment Banking Relationships (as of September 30, 2015) (as of September 30. 2015) Outperform: 55% Outperform:24% Neutral: 43% Neutral: 3% Underperform: 2% Underperform: 0% The Distribution of Ratings is required by FINRA rules: however WS' stock ratings of Outperform. Neutral, and Underperform most closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS' stock ratings are on a relative basis. The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS' total revenues, a portion of which are generated by WS' investment banking activities. Wedbush Equity Research Disclosures as of November 4, 2015 Company Disclosure Bitcoin Investment Trust 1 Research Disclosure Legend 1. WS makes a market in the securities of the subject company. 2. WS managed a public offering of securities within the last 12 months. 3. WS co-managed a public offering of securities within the last 12 months. 4. WS has received compensation for investment banking services within the last 12 months. 5. WS provided investment banking services within the last 12 months. 6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within the past 12 months. 10. The research analyst, a member of the research analysts household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks. 11. WS or one of its affiliates beneficially own 1% or more of the common equity securities. 12. The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the company's meeting certain clinical and regulatory milestones. Gil Luria Bltcoln Investment Trust 1 10 EFTA00606005  WEDBUSH Price Charts Wedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts for companies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed until the following quarter. Additional information on recommended securities is available on request. GBTC 1)07/09/15 OUTPERFORM $40 60 - rh re e, 40- = a. cn 're 30 0 20 03 2013 01 02 03 2014 01 02 03 2015 01 02 03 WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Out erform/ Neutral/Under erforrn on Jul 14. 2009. Please access the attached hyperlink for WS' Coverage Universe: research Applicable disclosure information is also available upon request by contactin Noeth Hin in the Research Department at MM by email to or You may also submit a written request to the following: Business Conduct Department. OTHER DISCLOSURES The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation. nor is any recommendation made herein based on any privileged information. This information is not intended to be nor should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein. This firm, Wedbush Securities, its officers, employees, and members of their families, or any one or more of them, and its discretionary and advisory accounts. may have a position in any security discussed herein or in related securities and may make, from time to time. purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to the information contained herein may be obtained upon request. Gil Luria Blteoln Investment Trust 111 EFTA00606006  WEDBUSH EQUITY RESEARCH DEPARTMENT DIRECTOR OF RESEARCH Mark D. 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