Why Wall Street analyst Tom Lee is betting on Ethereum with a $20bn raise

Tom Lee isn’t playing around.

The Wall Street strategist and new chairman of BitMine, a little-known Bitcoin miner recently turned Ethereum treasury, is raising a staggering $20 billion more to keep gobbling up more of the cryptocurrency.

That figure stunned analysts.

“It certainly caught me by surprise,” Luke Nolan, senior Ethereum research associate at CoinShares, told DL News. “It’s quite a big move and does signal their intention on vastly increasing their treasury size at quite a rapid pace.”

BitMine already holds about 1.2 million in Ether, worth roughly $5 billion. Since late July, when it kicked off its new corporate treasury scheme, shares are up fifteenfold.

‘True scarcity’

For Lee, the aggressive nature with which his — and potentially other — companies will add Ether to their balance sheet, is what many investors are overlooking.

“There’s true scarcity in Ethereum right now,” Lee previously told DL News.

But it’s not just the asset, “it’s the velocity at which we’re accumulating it,” he said.

Corporate crypto treasuries are in vogue. Michael Saylor kicked it off in August 2020, since then spurring an entire cast of copycats within the Bitcoin ecosystem. In the past months, firms are exploring further down the risk curve, adding alternative cryptocurrencies to their balance sheets.

It’s an “alarming” trend, some say.

‘Pretty bad development’

At the end of July, BitMine irked the cryptocurrency community when it announced a $1 billion stock buy back plan.

Instead of accumulating Ether, the company would buy back its shares, potentially stalling the momentum for both BitMine’s share price as well as the price of the cryptocurrency.

Critics said it was a “pretty bad development.”

Ethereum has since rallied, now trading at about $4,500 — just 10% shy from its November 2021 all-time high.

‘Counterintuitively aligned’

Nolan reckons the buyback plan and the $20 billion raise are part of a single, counterintuitive, playbook.

“This goes well with their recently announced $1b buyback plan,” Nolan told DL News.

“While counterintuitive: when the NAV premium is very high, issue shares to buy Ethereum. When the NAV premium is low, or even negative, use cash to buy shares.”

NAV stands for net asset value, and reflects the difference between a company’s value and the value of its underlying cryptocurrency holdings.

But NAV can cut both ways.

When demand for a company’s shares shrivels up, the price can drop below the value of the asset it holds. This is known as a discount to NAV.

It has happened before. For instance, with the Grayscale Bitcoin Trust, which at one point traded at a 50% discount. Grayscale managed to bounce back by transforming itself into a Bitcoin exchange-traded fund.

Although the discount faded, billions exited the fund, rotating into cheaper ETFs from BlackRock or Fidelity.

Pecking order

Additionally, BitMine’s approach, which Nolan called cautious, offers optionality for investors, Max Shannon, senior research associate at Bitwise, told DL News.

“Repurchase when undervalued, issue when overvalued, and improve the odds of sustaining a higher market NAV.”

As similar as Lee’s move to mimic Michael Saylor and purchase as much Ether as he can, the approach is setting BitMine apart, according to Nolan.

That’s because it “keeps shareholders at a higher level,” while MicroStrategy “has multiple share classes and debt obligations that mean equity holders are near the bottom on the pecking order,” Nolan said.

Pedro Solimano is DL News’ Buenos Aires-based markets correspondent. Got at a tip? Email him atpsolimano@dlnews.com.