Ether Capital reported Q3/22 financial results that were in line with our estimates. Ether Capital posted $0.7M in revenue in Q3, slightly below our estimate of $0.8M. The revenue was made up of $218K from consulting and $488K from staking/securities income, compared to our estimates of $300K and $500K respectively. ETHC ended the quarter with 23,610 Ether, 20,512 Staked Ether, 701 Staked Ether rewards, and $253K in cash. Ether Capital wrote down its investment in Wyre during the quarter; the investment is now carries at $2.03M vs. $4.18M Q2/22.

The most significant event for Ether Capital during the quarter was “The Merge”; a transition of the Ethereum blockchain from a proof of work, or miner-based system to one that is more environmentally friendly called proof of stake. The merge event occurred on September 6th 2022, and officially allowed Ether Capital to stake their Ethereum tokens to earn a fee and reward. The event was seen by many in the crypto sphere as a critical step in the advancement of the ecosystem, and a major milestone to further adoption. ETHC confirmed that gross staking “yield” for Q3/22 was 4.67% compared to 4.65% in Q2/22. Reading through the MD&A ETHC points to a post merge yield of 5.9% for the final two weeks of September. We have updated our model to reflect the new staking reality and we are expecting $500K in staking revenue in Q4/22 and $2.5M in 2023 (full year of 30K ETH staked at ~5% yield). As for ETHC’s consulting operations, the BTCC ETF now has $522M in AUM and ETHH ETF now has $180M in AUM, which will generate ETHC consulting revenue of $0.7M in 2023. We must remind readers that these expectations are subject to extreme market volatility.

In recent days, the crypto market has experienced tremendous volatility due to “FTX’s” failure Although this event remains isolated to the holdings of FTX customers, there has been sustained selling pressure across the asset class. We would like to remind readers that ETHC has a robust security initiative of cold storage with all unstaked assets; an event similar to FTX is highly unlikely to occur at ETHC. During the quarter ETHC wrote down the fair value of the company’s minority interest in Wyre Inc. The reassessment of fair value to $2.03M from $4.8M comes after a deal fell through where Bolt Financial was set to acquire Wyre, and consequently the minority stake from ETHC. We now view the Wyre stake as having limited materiality to the future potential of ETHC.

ETHC currently trades at a 28% discount to its liquid holdings alone ($2.21/share). Given the various upcoming opportunities for ETHC to begin generating value beyond its NAV and generate positive free cash flow, we believe the stock should trade at a premium. We are maintaining our BUY rating and revising our target price to $2.50/share (previously $4.00/share) due to the lower crypto prices and Wyre valuation.