Description

CoinShares

All numbers unless indicated differently are expressed in GBP, which is the functional currency of the company

CoinShares (CS.ST, hereon “CS”) listed in Sweden (Nordic Nasdaq) is one of the few listed digital asset investment firms and one of the earliest sponsors of listed, crypto-backed investment vehicles. [link to listing on NASDAQ here: https://t.co/gjq0hQqavf?amp=1]

CS is currently (as of Q2/21) trading at 3.8 P/E, despite enjoying 85% EBITDA margins, having a positive net current ratio with no long-term debt, having left the previous challenges the company had faced behind (explained further in the write-up), and having launched new products and partnerships that have the potential to increase revenues substantially. The company is likely trading at a bargain price because (1)  IPO’d in Sweden (Nordic Nasdaq) in March 2021 so the stock trades in SEK but the company reports in GBP (2) has faced net outflows during 2021 (its 2016 vintage ETP’s bear a 2.5% management fee that is no longer market rate) so the net increase of AUM has come from crypto price appreciation, (3) the market is focused on competition with cheaper products (4) screens very poorly (NI is meaningless as per the PnL) because accounting rules require any increase in the price of the crypto underlying the ETP’s to record a m-t-m loss above the NI line, but the offsetting gain flows outside of the PnL, requiring investors to do an extra step to see the true performance of the company, and (5) has low float inside ownership is +44% due to founders/management having significant skin in the game. These factors may explain why the company has not been discovered yet and why the opportunity exists. We believe the optical issues above are easy to overcome, while the outflows are expected to be reversed soon as CoinShares is executing a consolidation strategy in the public crypto vehicle space and will add new offerings given recent partnerships involving Invesco and other key players. At the current valuation of less than 4x P/E the risk-reward is extremely appealing to start a long position.

Disclosure: we are long.

Description:

CS is a publicly-traded asset manager in the cryptocurrency space, headquartered in Jersey, UK. CS generates income from management fees (mostly on the Bitcoin and Ethereum ETPs (CS has products tracking other crypto assets too), from gains generated from their trading desk (mostly by market making activities – CoinShares Capital Markets) and from their portfolio investments that we will ignore for this exercise and only show the optionality of that segment (we won’t give credit to the company for that line of business yet). As of Q2 of 2021 the company had c. 2.2 billion GBP in AUM.  / $ 3 billion

 The company generated EBITDA of 63 million GBP or 58 million Comprehensive Income for the first half of 2021. Half of that was generated by AUM fees and half by the CoinShares Capital Markets division (hereon “CSCM”).  At a price of SEK 75, with 66.5 million shares outstanding, the company’s market cap is 418 million GBP (GBPSEK 11.93), which implies a run-rate P/E of less than 4. The company does not have LT debt and has a positive current ratio.

Most of the growth in AUM has been driven by underlying asset price increases as the company has faced net outflows in the legacy XBT provider, as discussed more in depth below. However, given recent partnerships, we believe substantial growth can return based on inflows in new products. Important to mention that at the current level of AUM (that is c. 50% higher than at the end of Q2) Coinshares would be trading at a substantially lower multiple than compared to the one using the previous Q2 numbers used above.

Initiatives that the company has undertaken to increase the visibility to investors and projects that are generating revenue since Q3 but are not included in the valuation are the Elwood acquisition and partnership with Invesco that recently added USD $1 billion in AUM, a partnership with 3iQ, one with Finanzen, some recent hires of ETF veterans and the hiring of an IR specialist as mentioned in the last earnings call. The revenues coming from the partnership with Invesco (Elwood Fund) have not shown up in the financials yet.

In addition to that, the company enables live tracking of the AUM at any given time for the existing platforms (XBT(1) and the Physical platform (2)) and here one can track the AUM of the newly acquired Invesco ETF and for 3iQ. This creates an important level of transparency.

History

CS traces back to another company called Global Advisors Limited. In 2012 Daniel Masters (current chairman of the company) stumbled upon Bitcoin and decided to pivot into the digital assets market(3)(4). The company spent two years structuring the first product, a Bitcoin fund, and spent the next few years struggling to market the product. CS launched Global Advisors Bitcoin Investment Fund (“GABI” fund) in 2014. The fund was quoted on the Jersey Stock Exchange which, according to management, “made it challenging to evolve our investment mandate as quickly” as they would have liked. The next product on the line was XBT Provider, which was acquired in 2017. XBT was a Swedish company that offered tracking certificates on Nasdaq Sweden and provided CS with a platform to commercialize ETPs. This was a product that investors could easily buy through their traditional broker, thus making Bitcoin much more accessible.

More recently, in March 2021, the company went public on the Nasdaq First North Growth Market raising c. 12.8 GBP million.

Business Model

The company’s business is fundamentally divided in three segments: (1) fee-paying AUM based on ETP products, (2) CSCM and, (3) portfolio investments. The most important and attractive segment – and which also provides a large margin of safety in terms of valuation and of the business execution risk – is the ETP asset management business. However, with regards to the XBT provider, it is the segment that has experienced notable outflows as competition has entered the market with lower fee products. This has been mitigated by the launch of the physical platform and the products and partnerships listed above.

Asset Management Business

The ETPs that the company has issued come from two different in-house providers: (1) issued by XBT Provider and, (2) issued by CSDS. The notes issued by XBT are retail-oriented and this is where the bulk of the company’s AUM comes from, and the notes issued by CSDS, an institutional-oriented platform, launched in Q1 2021. The notes issued by CSDS, unlike XBT (which must be at least 75% physically backed), are 100% physically backed by the asset the ETP is tracking.  (See the “Financials” section below for a more detailed description of the AUM of these two series).

The company focuses on commercializing ETPs in Europe. CS’s main ETPs, which began trading in 2015, consist of Bitcoin (79% of AUM) and Ethereum (20% of AUM)(5) pg. 26, Prospectus, each issued in both SEK and EUR, with the remaining 1% relating to Litecoin and XRP. As of the 19th of August of this year, 88% of ETPs are certificates issued by XBT. The remaining are certificates issued by CSDS. The ETPs issued by XBT command 2.5% management fee. The 100% physically backed ETPs carry a 0.98% management fee.

Considering that the counterparty of the ETPs issued by XBT is the internal division (CSCM), it is important to understand the dynamics. CS has a swap agreement with (CSCM), that contracts to provide the return on the underlying asset(6) pg. 26, Prospectus. The agreement that was established with CSCM is so that must have 75% of the assets backed with physical assets and 25% can be in other instruments such as futures, etc.(7) pg. 26, Prospectus – although in our calls with management, management confirmed that physical assets have typically backed >95% of the ETPs. More information about the agreement between XBT and CSCM (counterparty) can be found on pg. 80 of the Prospectus. Furthermore, information between CSCM and Komainu (counterparty to CSCM) can be found on pg. 82 of the Prospectus. This arrangement has the unintended consequence of requiring the company to include the digital assets and liabilities that CSCM holds to back the notes, on the balance sheet. This creates an accounting mismatch, as the movement of the fair value of the digital assets goes to Comprehensive Income, while the movement of the liability backing those assets goes to the PnL (the notes).

The company’s AUM have grown enormously from c. $500 million at the beginning of 2020 to currently +$4.4 billion. This has been driven by underlying price increases of the crypto currencies, as the ETPs have experienced net outflows of c. $580 million between mid-November of 2020 and August 2021. This coincides with what the CFO said in Q2 of 2021 where he mentioned that price was the “key driver” of AUM growth since its inception in 2015. The causes of the outflows have been due to a combination of four factors: (1) note holders taking profits, (2) regulatory attack, (3) competition entering the market with lower fee products, (4) Brexit and (5) the UK ban on crypto products to retail investors. These are discussed in more detail in the “Risk/Challenges” section. However, there are strong reasons to believe that these setbacks have been left behind. It’s also important to note that CS provides weekly flows of the major providers of crypto products (hyperlinked above).

Back in 2016 CS’s client base was essentially 100% retail and based in Sweden. Over time, the company was able to diversify their client base substantially, and it’s now much more spread between the Nordics and Germany. Germany has become the center of gravity and now the company’s products are also listed on German exchanges. The distribution has therefore become much more robust – with 15% retail, 16% institutional and 70% from platform investors to tax preferred pension investments – and now also includes institutional investors and some very important partnerships. While the XBT provider has experienced net outflows, the number of retail clients holding the notes has continually increased, currently at around 71k, as per our conversations with management.

CS has pushed to make crypto assets more accessible to retail and institutional investors. CEO of Komainu (a custodian, a CS joint venture), Henson Orser,  said: “Right now, an institutional investor looking to take exposure to crypto has to move fiat currency from a traditional custodian to a crypto exchange where it might acquire stablecoins that it then holds in a hot wallet to exchange for crypto, which it finally transfers to a cold wallet for custody.” He says: “That is a lot of steps and a lot of operational risk, and there’s demand now to make that all more seamless and to provide more of a crypto prime- brokerage service for institutions to borrow and lend against crypto collateral.” CS started listing products in Sweden, then Switzerland, now Germany (already on three exchanges) and is now looking at Euronext.

Accounting Particulars with the Asset Management Business

Unlike other asset managers, there are two particulars with the company’s accounting methods that investors should focus on:

1.   The first thing to consider is that the company must include the value of the notes it holds on behalf of investors and the digital assets backing those notes in its balance sheet

2.   Most of the AUM pertains to ETPs that were initially issued in 2015. These ETPs were structured in a way that prevents management fees from being realizable on an ongoing basis(8) pg. 26, Prospectus.

Starting with point (1). As mentioned above, the reason why the company must report the clients’ assets (and a corresponding liabilities) on their balance sheet is because CSCM (a company  which is part of the CS group) is a counterparty to these notes(9) pg. 26, Prospectus. The consolidated financial statements are also from the perspective of the CSCM business. The liability is comprised of a similarly sized line item (not equal, we will explain why below) that represents the obligation to repay the investors the amount of digital currency they hold.

Point (2). Management fees are only converted into cash when the investor sells the ETP, while fee revenues are accrued daily. The origin of this problem comes from XBT. As mentioned earlier, the company bought XBT with that set-up and XBT had the fees structured in a way that originated this mismatch. Management has tried to change this, but it has not been possible. However, all the recently launched products, including the physical tracker, allow the management fee to be realized on an ongoing basis(11) pg. 29, Prospectus.

This in theory can cause large differences between revenue/earnings recognized and actual cash generated by the business. Nevertheless, as the notes have been in existance for several years there is a natural flow of sellers. In FY2020, 72% of EBITDA converted to cash flow from operations, evidencing that the mismatch is not a problem over longer periods longer than a few quarters.  

Custodian for Asset Management

The custodian for CS is Komainu. Komainu is itself a joint venture between CS, Nomura (investment bank) and Ledger (cybersecurity specialist). CS holds a 14.3% stake in this company.

Digital currencies are instruments whereby the proof of ownership doesn’t reside in a centralized authority. It is instead evidenced by the control of a private key that, when paired with a public key, can be used to transfer the ownership of digital currencies. It follows then that the storage/custody of digital currencies is concerned with maintaining the private key secure. Private keys are essentially stored in two ways: (1) “hot” storage, where the private key is maintained in a system or “wallet” that is online and readily accessible for use (like an online bank account) or, (2) “cold” storage, whereby the private key is held offline, inaccessible unless provided by the holder of the key. In this method, the keys are generally held in hardware wallets that are not connected to the internet. Private keys in cold storage are stored in vaults. CS holds c. 85% of its digital assets in cold storage(12) pg. 27, Prospectus.

Capital Markets Division (CSCM)

The CSCM is charged with (1) providing liquidity to their own ETPs, (2) making non-directional trades, delta neutral (fixed income activities + arbitrage strategies) Prospectus pg. 23 and (3) lending and lastly (4) executing the hedges for the ETPs issued by XBT. It is important to mention that while the income generated by this segment tends to track the revenues generated by the fees of the AUM segment, management has indicated that we should not expect that pattern to have any meaning. The gains from the CSCM benefit largely from volatile environments and, as mentioned by management, as the strategies are delta neutral this should not add any extra risk to CS.

Portfolio Investments

1.   3iQ (9% stake)

2.   Komainu (14.3% stake)

3.   Kingdom Trust/SBG

4.   Viridi

5.   Solana tokens

6.   GTSA

This division uses CS’s balance sheet to make investments in the space. Below, management explains in more detail:

I can take this one. Meltem Demirors here. So, we’re very excited about the introduction of staking. It’s generally across the crypto ecosystem. It’s a model that is becoming more and more prevalent. So, to answer the question, specifically, we are making our own assets. So, the salon that we hold in our balance sheet, they are principal investments portfolio is being staked. We’re also operating a public validator via Solana Beach, which is a site where you can view all of the different nodes you can delegate to in the Solana ecosystem. And so, if folks would like to, they can delegate to our nodes there as well. And in addition, we are also looking at other opportunities to integrate staking for a wide variety of assets into our capital markets infrastructure footprint, which Richard and JeanMarie have both spoken about at length, as well as into our product footprints. I think one of the key areas of innovation that we are excited about is really determining how we can integrate staking and staking rewards into the product constructions we have on our asset management platform, which is something we’ve not seen yet to date in the asset management space. And lastly, we’ll continue to look for opportunities on the investment side to invest in staking service providers in the future as well.

Jean-Marie Mognetti

We also want to give our clients and investors the full benefit of the blockchain technology, especially in the case of single product ETPs. And we’re really bringing value added if we were to do an index or basket. So, let’s take the example of staking as an example, which was discussed by Meltem a couple of seconds ago. We really want to introduce staking in all ETP, [in all ETPs]. But there is a few condition to meet first. A, we want to be able to disclose an [ultimate] condition with complete transparency how this process work and how it is done. It has never been done before. So, it’s again, [fine] for CoinShares. B, we want to be able to share the proceeds of this technology benefit with our customers and paying them the yield awarded by this staking. However, this is creating some tax issue, which also needs to be investigated and take a lot of detail to find the right answer. And, C, we need to have the right infrastructure in place supported, which as explained by Meltem a couple of seconds ago, this is something we are building right now. Regarding the index and basket, I think the key answer is also yes. And which is why we are working with research lab like Imperial College, to bring something very different with adding value to our client, something more exciting than taking three coins and equally weighting them with a yearly [rebalance]. So, that’s kind of what we’re working on. But you also have to bear in mind that we are also dependent on all the stakeholder. Once the regulator are happy or ready to accept in the prospectus with the stock exchange are ready to list on their venues, and when the clearer of this values stock exchange are ready to clear through their venue as well. So, at the end, the big decision matrix, which is guiding our choice but we’re always keeping the investors’ best interest in mind.

We are not going to assign any value to this segment, we only want to highlight that the optionality of it is huge. As an example, take KR1, KR1 is the gold standard in terms of investments in blockchain projects, particularly in regards to web3. KR1 has converted 2.7 million GBP into more than 200 million GBP since 2016 purely by their profitable investments. If Coinshares can do something roughly similar, the creation of value can be substantial. In addition, this can lead to a situation where CS is not only seen as a consolidator offering crypto products but as a smart enabler of the development of blockchain technologies, just as KR1.

Partnerships

Given the company’s appetite towards distributing their products widely and becoming the go-to company for all things crypto for large asset managers, we will look at some important and recent accomplishments by the CEO Jean-Marie Mognetti that are still not reflected in the financials and definitely not in the stock price. These accomplishments bring the company a step closer to their ultimate vision.

1.   Partnership with Invesco. The partnership with Invesco came about when CS bought Elwood Technologies which had the Invesco Elwood Global Blockchain Equity ETF. The index offers exposure to internationally listed companies generating revenue from blockchain technology. It has +$1 billion in AUM (and is also available to UK residents).

CS (formerly Elwood) is responsible for the composition of the reference index for the ETF(12) pg. 12, ETF Supplement. Elwood assigns a rating to companies based on how influenced they are by blockchain. They rate companies and then build the index. Invesco is in charge of the distribution.

The management fee on this ETF is 0.65%. CS has a revenue share agreement of 50/50 with Invesco. This means that CS will start reporting an additional 2.4 million GBP in revenue, which will mostly drop to the bottom line (assuming current AUM). The company paid $17 million for Elwood by issuing shares at 35% premium to market. 

It's also important to focus on the fact that Invesco had to consent with CS acquiring Elwood. The ETF has the potential to substantially increase CS’s geographic exposure – particularly given the fact it’s much easier to channel an ETF through risk committees/board approvals compared to a digital asset ETP. The acquisition may also provide a platform for future collaborations between Invesco and CS, with Invesco able to feed large amounts of AUM into these products and open Invesco’s cEuropean client base (mostly institutions) to CS.

In addition the largest Thai commercial bank (SIAM) created a feeder fund that will feed into this ETF. This is relevant because if they manage to get traction there, they can replicate that throughout other countries in Asia.

2.   Partnership with 3iQ. In December 2020 CS agreed to buy 9% of 3iQ. 3iQ launched CS sponsored Bitcoin and Ethereum ETF. The products have $925 and +$270 million in AUM, respectively. Both carry a management fee of 1%. CS has a share revenue agreement with 3iQ. CS also made an investment in the units of Bitcoin ETF that 3iQ issued.

From our conversations with management, we have the understanding that the revenue share agreement with 3iQ is so that CS gets c. 25% of the management fees generated. However, given the fact that CS has no costs (e.g. custody), any cash that comes in goes directly to the bottom line. These products are relatively new and bring pure optionality.

3iQ currently has a total of $1.195 billion in AUM.

3.   Lastly, there’s a partnership with Finanzen. Finanzen is trying to create a sort-of-Robinhood in Germany. CS will be the sole provider of crypto products and they will earn their normal fees.

Finanzen is a very large platform with millions of monthly readers and 65 million monthly visits on their website. It’s hard to predict how much Finanzen will feed to the ETPs in terms of AUM, but it provides a lot of optionality. And again, this requires no capital, so there’s only upside.

 Financials

The three key indicators for the performance of this business mentioned by management are EBITDA, the Total Comprehensive Income, and the level of AUM. However, given the nature of this business we want to focus more on a P/E metric and believe that the comprehensive Income statement better reflects the reality of the business.

The accounting peculiarities mentioned previously render the PnL statement somewhat useless without context. EBITDA and the Comprehensive Income statement will strip out that accounting mismatch mentioned above, it will also disclose trading gains separately (which is mixed up with change in value of the digital assets in the Comprehensive Income), and then reconciles that back to Total Comprehensive Income. The reconciliation from adjusted EBITDA to Total Comprehensive Income is done by including taxation, depreciation/amortization, interest expense, FX effect and unrealized gain/(loss) on investments.

Trading gains should match pretty closely (but not 100%) the three-line items in the Statement of Comprehensive Income. To arrive at the trading gains generated, we need to strip out the change in value of the digital assets by netting it off against the change in value of the obligation (which is in the PnL). Trading Gains Approximation = Intercompany collateral (expense)/income + Realized gain on digital assets/financial instruments + Fair value gain/(loss) on digital assets.

The trading gains produced have tracked almost in parallel the revenues generated by the fees of the AUM segment over the last quarters, however management has indicated that that is more a coincidence, and we should not assume that correlation to have any meaning. With that in mind, and for this exercise, we assume that correlation continues and gains from CSCM keep tracking the revenues of the fees for our estimates, as more AUM should imply more market making activities..

The company just reported Q2 with numbers for the last six months of:  EBITDA of 62.8 million GBP and Comprehensive Income of 58.7 million GBP (all for H1 2021). This was with an average balance of AUM of $3 billion in Q2 alone (end of quarter). We will ignore the 4 million GBP gain on investments, as we will not give any credit to the company for that, this leads us to a fully diluted EPS annualized run rate of GBP 1.64 => at an FX rate GBPSEK of 11,93, the P/E turns to be 3.8

However, the extreme undervaluation does not end there; we can additionally assume continued outflows and still find it to be cheap because of the rise in crypto prices since the second quarter.

As of Q2 of 2021 the company had c. 2.2 billion GBP / $3 bullion USD in AUM .  However, crypto prices are up substantially since June 30th; bitcoin is up ~37% since then, as of Aug 23, 2021. AUM is now 3.4  billion GBP which is easy to track in real time through independent attestation from Armanino LP linked here (1)(2). So how much of this growth in AUM is from crypto prices?  The company makes it easy to solve this question on a weekly basis through a blog from its research department that tracks inflows across the industry here: https://medium.com/coinshares/vol-40-digital-asset-fund-flows-weekly-bc1c2dabe1d0.  This blog post reveals that Coinshares' two classes of funds saw outflows of USD -80 million (-58.3 million GBP) in June. In the month through Aug 20th, CS saw an additional outflow of USD -70mm (-51 million GBP).  (Year to date, that is a total of US-612 million (445 million GBP) in outflows.) So despite a total of 109 million GBP of outflows since the June 30th reported financials, the AUM has grown by 1 billion GBP in about 1.5 months due to crypto price increases. 

Incidentally, the company began breaking out the two series of ETP’s (XBT and Physical) in this blog in August. https://medium.com/coinshares/vol-43-digital-asset-fund-flows-weekly-cd5ae7be4a1.  We can see that fund outflows of XBT (which charges 2.5%) were offset by strong inflows of the Physical series which charges 0.98%.

If we make a really crude assumption that net outflows for Physical and XBT combined are another -445 million GBP from today (to make math easy we repeat what we saw YTD), that means Coinshares would end the year at 2.4 billion GBP AUM for XBT and 630 million GBP for the Physical series, or a total of 3.0 billion GBP of AUM, all else equal.  Fee income would be 2.4b GBP x 2.5% + 0.63b x .98%= $66 million GBP annualized rate of fee revenue, an increase of 3 million GBP over the company’s YTD annualized asset management fee revenue of 63 million GBP.  Since our estimate of AUM six months from now generates fee revenue that is roughly the same as the company’s 1H2021 annualized level, we can crudely use that as a proxy for the forward 12 month earnings.

This will not become a static level of AUM of course--we are likely to continue to see outflows in XBT, which management acknowledged in our conversations.  But they did point out that they have actually been gaining accounts in XBT despite the outflows. XBT account figures reported to us in these conversations were 26k, 30k and 65k at 4Q2020, 1Q2021 and 2Q2021. The large XBT accounts that cashed out of the ETP after crypto prices skyrocketed in the first quarter of 2021 were sitting on large capital gains, so they were probably not moving to other alternative ETF’s just to save on management fees. These two data points suggest that outflows in XBT may occur at a lower rate going forward than we have seen YTD.

When calculating net income, we add the Fair value gain/(loss) on digital assets shown in the Other comprehensive income segment of the company’s income statement (1.4 billion GBP in 1H2021), and we reverse the Realised gain/(loss) on investments of 3.5mm GBP in 1H2021. So given our assumptions above, continued outflows at the current rate would give us:

(Loss) after taxation: -1,379 million GBP)

Plus gain on investments 1,437 million GBP

Less 3.5 million GBP

= 55 million GBP x 2 = 110 million GBP annualized net income on a forward basis.

Against a 418 million GBP market cap, this yields a 3.8x P/E ratio on a prospective basis under these limited assumptions.

The above estimate does not give any credit to the Elwood ETF that is generating fees today and the 3iQ partnership (with more than US$2 billion of AUM in total among those two) and the potential of the Finanzen partnership, portfolio investments and any new products that might come, so in reality the company can be trading at something below 3x P/E ratio if we take all of that into account.

We do not see a reason why CS’ valuation cannot double only for being discovered. In addition, a benign crypto environment can even boost the profits of the company dramatically, but that environment is not necessary for the investment to work at all. At the current valuation, the margin of safety is too large to be ignored.

Risks Section

Challenges the company has been facing:

Although many of the challenges laid out have been overcome by the current CEO Jean-Marie Mognetti (former head of CSCM), it is still very important to keep them in mind. The remains of these challenges may account in a large degree for why the opportunity exists. So, why does it exist?

1.   ETPs have lost market share due to significant outflows over the past year. The factors that account for this outflow is a combination of (1) regulatory attack, (2) competition and (3) profit taking by noteholders.

Starting in 2013, CS was very early in the crypto-asset space. When Bitcoin’s price started increasing dramatically in 2017, regulators started poking into CS. Many current competitors of CS have benefitted from the company coming to the space first, as it was the one who began to have conversations and develop a framework with regulators. CS was essentially punished for being first in a regulatory manner. Regulators have made them spend lots of hours in queries, and that time spent on that allowed the competition to enter the space.

Another reason that accounts for the net outflows, was aggressive competition. Competitors attacked by offering lower fees and having better distribution.

 Some note holders, which held the ETPs for a long time, have had large unrealized profits, and have now taken their profits. Although this may continue to happen, in our calls with management they claimed there has been a dramatic acceleration in the number of new accounts in XBT.

2.   Brexit & European Market. CS is focused on the European market. Unlike some U.S./Canadian competitors that operate in very large end-markets, CS operates in Europe. The continent encompasses 44 countries – different legal systems, different regulatory appetites towards crypto-assets, etc. Some U.S./Canadian competitors have been able to grow much faster – not because of being more innovative in terms of products – but because they operated in much larger end markets. Furthermore, being a Jersey based business, Brexit has been a challenge on the regulatory and compliance, particularly during the launch of the CSDS platform.

3.   Problem listing in LSE. The LSE is very skeptical and critical of the crypto-asset space. Therefore, the company opted to list in Sweden, where they were able to build a strong relationship with Nasdaq.

4.   Shareholder Base: CS does not have a natural shareholder base, CS is listed in Sweden and reports in GBP, this does not help discover the company nor it screens well given the accounting rules explained above that render the NI meaningless.

Risks

1.   More aggressive/better competition can jeopardize the investment by (1) causing net outflows and (2) lowering the weighted average fees the company is able to generate. Some fee pressure has been seen (management fee of XBT vs. CSDS), although this is, to some degree, also a reflection of the fact that there is always more fee pressure with institutional offerings.

2.   A poor crypto-asset environment

3.   Inability to build out partnerships to distribute products.

4.   New products get no traction.

5.   As fees on the XTB provider are “locked” until note holders sell the notes, there could be a scenario that CS does generate large revenues but is unable to convert them into cash

6.   Regulation: Regulators have not been friendly towards crypto nor towards companies like CS involved in the space. Regulators have rejected M&A deals to CS, made CS slow down their development by endless queries, and this has allowed competition to enter the market. It is uncertain how the regulator's attitude will evolve with time.

Catalyst

• The stock being discovered
• Traction on the partnership with Invesco
• Success with the Partnership with Finanzen
• Further accretive M&A deals