Needham & Co. LLC, a New York City-based investment firm, has begun covering the Bitcoin Investment Trust (BIT), giving it a “buy” rating and a $62.00 price target (PT). Needham estimates the present per-bitcoin value at $655.
BIT is sponsored by Grayscale Investments, which is owned by Digital Currency Group, which invests in the blockchain and digital currency ecosystem. BIT is a private, open-ended trust that invests only in bitcoin. Hence, the value is based primarily on the bitcoin price.
Needham, according to a 39-page report explaining its “buy” at $62 PT, believes the price of bitcoin stands to benefit substantially from rising demand for its two main use cases as an alternative payments channel and as a “digital gold.” The growing demand is driven by market trends such as expanding ecommerce, globalization, and by the pervasiveness of enabling technology like mobile phones.
The report says bitcoin is disrupting trillion-dollar markets in value exchange and payments.
BIT shares are benefiting from the increase in the value in bitcoin, their underlying security. Based on projected demand for bitcoin as a payments channel and “digital gold,” Needham estimates a present value of $655 per bitcoin, which equates to a $62 per share price of the BIT.
Aggregating the two sources of demand for bitcoin (as a payments channel and as “digital gold”) Needham estimates a 2020 required monetary base of $34 billion. Given a 2020 estimated average bitcoin supply of 18 million, the required price of bitcoin in 2020 to support demand is estimated to be $1,896. Needham applies a discount rate of 25% to arrive at a present value for bitcoin of $655, which equates to a price target of $62 per share of the BIT.
Bitcoin and its underlying technology are among the most important innovations in payments and money in decades, if not centuries, the report noted. Similar to how the internet created a global, open network for information exchange, bitcoin and its underlying blockchain technology are enabling an open global network for value exchange.
All four of the major stakeholder segments – developers, transaction processors (miners securing the network), merchants, and consumers – are demonstrating impressive growth.
The demand for bitcoin as a payments channel will outpace the demand for bitcoin as a “digital gold.” The strongest adoption will be as an alternative payments channel for cross-border payments and in emerging markets.
For institutional and accredited investors, gaining exposure to bitcoin through the BIT is the titled, auditable exposure provided. The BIT addresses the unique challenges of acquiring and securely storing bitcoin properly.
Grayscale addresses these challenges by removing much of the complexity and potentially the risk of storing and acquiring bitcoin while providing a traditional titled and auditable investment wrapper.
The paper goes into detail describing the advantages bitcoin offers in intermediating friction and lowering the cost of money transactions.
It also goes into detail on bitcoin’s favorable traits as a currency compared to fiat currency and gold.
Needham acknowledged the bitcoin network’s current throughput capacity limitations. It noted that solutions are emerging to scale the bitcoin network and improve throughput capacity.
The company expects to see more products, applications and services built on and around bitcoin that will solve consumer pain points and push adoption.
If bitcoin services were available through major financial institutions, this could significantly improve access and be a positive catalyst for the price. If investors could gain exposure to bitcoin through an exchange-traded fund listed on a major stock exchange through their regular brokerage account, it could also have a significant positive impact on price.
Needham estimated that roughly 75% of all bitcoin is currently dormant or held as an investment in bitcoin as a “digital gold.” The currency’s appeal in this segment is mainly due to its known finite supply and its value as a liquid speculative investment.
Considering a current total bitcoin market capitalization of $6.4 billion, Needham estimated the portion of bitcoin’s total market capitalization associated with its value as a “digital gold” to be about $4.8 billion.
While other digitally-native payments networks have improved the digital value exchange experience, such solutions rely ultimately on the legacy financial system’s pre-existing, siloed infrastructure.
These networks have made it easier to use infrastructure, but they have not created new infrastructure. Bitcoin is a new digital value exchange infrastructure.
Bitcoin has been associated with some illicit activities and been portrayed as anti-establishment or anti-government, the report noted. The essential point, however, is that bitcoin enables people to be fully in control of their money and transaction activity and it is used for legitimate purposes extensively.
Bitcoin continues to grow and improve due to a vibrant open-source community of developers that see to add new features and functionality to money and value exchange.
BIT is available to accredited investors and requires a $25,000 minimum investment. The trust charges 2% yearly for safekeeping and administration. Investors can redeem shares in the secondary market following a 1-year lock-up period.
The process for adding new shares to the secondary market is somewhat restricted. As a result, the price of GBTC shares quoted on OTCQX can trade at a premium or discount from the trust’s net asset value. If the process for redeeming and creating shares were less restricted, the levels of discounts and premiums would likely dissipate in response to arbitrage opportunities.
Retail investors have to contend with a hefty premium for GBTC shares traded on OTCQX (currently more than 30% premium) that is hard to predict or rely on. Hence, retail investors comfortable with acquiring and storing bitcoin may be better off acquiring it directly from an exchange.
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Last modified: March 4, 2021 4:47 PM