CoinShares International — A likely beneficial survivor of the crypto winter

CoinShares International (OMX: CS)

Last close As at 13/04/2024

SEK58.90

2.90 (5.18%)

Market capitalisation

SEK3,985m

More on this equity

Research: Financials

CoinShares International — A likely beneficial survivor of the crypto winter

CoinShares International (CS) reported a moderate £6.5m EBITDA loss in FY22 (vs a £121.1m profit in FY21), affected by the ‘crypto winter’ (which follows the exuberance of 2021), marked by declining asset prices and high-profile bankruptcies. The turmoil last year (most notably the collapse of the FTX exchange) led CS to wind down its nascent B2C business and take a more cautious approach in its capital markets infrastructure (CSCM) division. Nevertheless, its balance sheet remains sound with total equity of £204.0m at end-2022 (vs £200.9m at end-2021).

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

CoinShares International

A likely beneficial survivor of the crypto winter

Company outlook

Financials

20 March 2023

Price

SEK31.00

Market cap

SEK2,112m

SEK12.8025£

US$1.2180/£

Total equity at end-2022

£204.0m

Shares in issue

68.1m

Free float

28.4%

Code

CS

Primary exchange

Nasdaq Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.8)

44.5

(60.3)

Rel (local)

2.2

41.9

(55.4)

52-week high/low

SEK84.0

SEK19.0

Business description

CoinShares International develops innovative infrastructure, financial products and services for the digital asset class. It manages and provides liquidity for exchange traded products and undertakes proprietary trading in digital assets.

Next events

Annual report 2022

28 April 2023

Q123 results

9 May 2023

Analyst

Milosz Papst

+44 (0)20 3077 5700

CoinShares International is a research client of Edison Investment Research Limited

CoinShares International (CS) reported a moderate £6.5m EBITDA loss in FY22 (vs a £121.1m profit in FY21), affected by the ‘crypto winter’ (which follows the exuberance of 2021), marked by declining asset prices and high-profile bankruptcies. The turmoil last year (most notably the collapse of the FTX exchange) led CS to wind down its nascent B2C business and take a more cautious approach in its capital markets infrastructure (CSCM) division. Nevertheless, its balance sheet remains sound with total equity of £204.0m at end-2022 (vs £200.9m at end-2021).

Year
end

Revenue
(£m)

Adjusted
EBITDA* (£m)

Adjusted
EPS** (£)

DPS
(£)

P/E
(x)

Yield
(%)

12/21

80.8

121.1

1.62

0.0

1.5

N/A

12/22

51.5

(6.5)

0.04

0.0

60.5

N/A

12/23e

37.8

25.2

0.26

0.0

9.5

N/A

12/24e

50.0

41.0

0.43

0.0

5.6

N/A

Note: *Sum of revenue, income and gains from capital markets infrastructure and gains on principal investments less administrative expenses excluding D&A. **Total comprehensive income per share attributable to the shareholders of the parent.

Disruptive potential intact despite tough 2022

We note that major crypto downturns like the one in 2022 occur regularly, being the manifestation of the sector’s inherent high volatility. Importantly, except for the Terra/LUNA project, major failures in 2022 were mostly associated with centralised entities rather than decentralised finance (DeFi), which we consider one of the core value propositions of public blockchains. Moreover, despite the crypto winter, we saw continued technological progress in the sector, such as Ethereum’s ‘Merge’ or projects connecting the on-chain environment to real-world assets. Digital assets have grown ‘too big to ignore’, even if the current adoption rate varies by investor group. Still, near-term adoption may be dampened by low market liquidity and gaps in infrastructure left by the collapse of some service providers (eg Silvergate Bank).

FY22 results burdened by two major one-time events

CS generated management fee income of £50.1m in FY22 (vs £80.4m in FY21), with the fall stemming from lower digital asset prices and continued net outflows from its legacy XBT Provider products (at c US$446m in FY22, down from c US$1.2bn in FY21). Meanwhile, its institutional-grade CoinShares Physical ETPs enjoyed net inflows in excess of US$140m, while its blockchain equity ETF business saw minor US$7m net inflows. CSCM reported income and gains before extraordinary items of £26.5m, which was more than offset by the c £17m loss on the Terra/LUNA collapse and a £26m provision in respect of assets held on FTX.

Valuation: Our DCF valuation implies large upside

Assuming continued digital asset adoption, we value CS at SEK77.4 per share (vs SEK70.0 previously). Using a more cautious scenario with digital asset price growth at only 2% pa (ie the European Central Bank’s and Federal Reserve’s inflation target), we value CS at SEK33.9. We note that the combined value of CS’s gross cash (£26.6m), accrued XBT Provider fees (c £137m) and net amounts from brokers (£98m) at end-2022 exceeds CS’s current market cap of c £165m.

Investment summary

Company description: Tech-driven pioneer in digital assets

CS is a leading European digital asset firm that provides institutional and retail investors access to digital assets in a secure, transparent and regulated way. The company is built on a strong technology backbone (the ‘Galata’ platform), which is the foundation of its two major business verticals: asset management platforms, including the passive investment products (ETPs) and exchange traded fund (ETF) platform, and the capital markets infrastructure, which is active in liquidity provisioning (for its XBT Provider products), fixed income investments, DeFi investments and proprietary trading based on low-latency delta-neutral (ie non-directional) strategies aimed at exploiting market inefficiencies. Consequently, the company is more than a simple beta play/proxy on the bitcoin (BTC) price, as it provides the opportunity to benefit from both overall progress in terms of digital asset adoption (and the potential accompanying increase in the market capitalisation of major cryptocurrencies) and market volatility in the sector.

Valuation: Implies 150% upside potential

Our discounted cash flow valuation implies a fair value per share of SEK77.4 (vs SEK70.0 previously), which represents a more than 100% upside to the current share price. This is supported by a combination of expanding addressable market (see below) and CS being able to keep a significant market share in the European digital asset ETP/ETF market given its current leadership position. As the management fee on XBT Provider Trackers is accrued daily but converted into cash to CS only on redemption of the units (c US$40m inflow for CS in 2022), we are factoring in a working capital adjustment in our model. However, this should diminish as CoinShares Physical’s assets under management (AUM) (where fees are accumulated in digital assets daily and converted by CS into cash at will) becomes more significant and as earlier investors in the XBT Provider ETPs decide to cash out.

Sensitivities: Fair value at SEK33.9 at a price growth of 2% pa

Predicting the exact prospective price path for digital assets is quite challenging. Consequently, we have decided to present a summary of our forecasts and valuation for CS in a scenario in which digital asset prices grow at 2% pa from the current level (ie BTC at c US$28,000 and Ether (ETH) at c US$1,800). Under this scenario, we value CS at SEK33.9 per share. Other major sensitivities include the adoption path of digital assets, crypto contagion from recent high-profile failures in the industry, competitive pressure, regulatory risks and the XBT Provider Tracker’s redemption pattern.

Financials: Digital assets adoption to drive strong AUM growth

Despite last year’s bear market (which brought CS’s total AUM down to £1.44bn (c US$1.74bn) at end-2022, from £4.18bn (c US$5.66bn) at end-2021 and £1.74bn (c US$2.38bn) at end-2020), we still anticipate that the secular trend of digital assets adoption will continue in the coming years, driving global portfolio allocations to c 1.80% by 2026 and 2.50% by 2030 (compared to c 0.5% currently and c 1% at end-2021). We believe that the recent high-profile collapses of centralised crypto players (see our recent Edison Explains piece for details) will further improve the market share of regulated and transparent investment products such as CS’s exchange-traded products (ETPs). Based on this, we forecast CS’s total ETP AUM to grow from US$1.22bn at end-2022 to US$6.8bn at end-2026 and US$10.6bn by 2030 (and the blockchain equity ETF AUM to grow from US$525m at end-2022 to US$1.6bn in 2026 and US$2.9bn in 2030). CS’s capital markets business was affected by two major events in 2022 (the Terra/LUNA and FTX/Alameda collapses), which we think will translate into a more cautious approach from CS to generating income and gains from its trading strategies, which we forecast at £20.9m and £32.1m in FY23e and FY24e, respectively (vs c £26.5m in FY22 excluding exceptional losses), see Exhibit 1. In turn, we estimate CS’s adjusted EBITDA at £25.2m and £41.0m in FY23e and FY24e, respectively (vs a £6.5m loss in FY22 and a £121.1m profit in FY21).

Exhibit 1: Edison forecast summary FY23–27e

£m unless otherwise stated

FY21

FY22

FY23e

FY24e

FY25e

FY26e

FY27e

Assets under management (US$m)

5,657

1,741

3,063

4,715

7,344

8,438

9,821

Asset management revenue

80.4

50.1

37.8

50.0

73.9

91.8

100.3

Gains/income from capital markets activities

61.2

(17.4)

20.9

32.1

41.0

39.2

41.7

Administrative expenses excluding D&A

(30.8)

(35.3)

(33.4)

(41.2)

(50.9)

(59.9)

(66.1)

Adjusted EBITDA

121.1

(6.5)

25.2

41.0

64.0

71.1

75.9

Source: CoinShares data, Edison Investment Research. Note: Further details on CS’s results are included in the ‘Financials’ section.

Company description: Top crypto ETP issuer in Europe

CS is one of the pioneers in the emerging digital assets sector, formed in 2013 and headquartered in Jersey, with offices in London and New York. It is a well-established player in a nascent, high-growth industry and one of the largest digital asset companies in Europe and globally, with total AUM of c £1.44bn at end-2022. It has been at the forefront of introducing innovative investment products based on digital assets since its inception. The company’s backbone is its in-house technology infrastructure (the ‘Galata’ platform), required to operate efficiently in markets that are open 24/7 with very fragmented liquidity across trading venues (centralised and decentralised crypto exchanges, as well as OTC markets) and also used to stay connected to traditional exchanges. CS’s focus on continuous development of its infrastructure and technology layer is a critical component of its product innovation in the fast-changing digital assets industry, which is heavily reliant on code development capabilities.

Established to facilitate the emergence of a new asset class

The team behind CS consists of experienced professionals from the commodities trading business. Two of its co-founders (Daniel Masters and Russell Newton) set up the specialist commodities hedge fund manager Global Advisors in 1999, leveraging their experience from, among others, JP Morgan (where Daniel Masters was global head of energy trading), Royal Dutch Shell, Phibro and Salomon Brothers. Jean-Marie Mognetti, CS’s third co-founder, current CEO and a major shareholder, is a former commodities quantitative trader and joined Daniel Masters and Russel Newton at Global Advisors in 2011.

Daniel Masters witnessed the emergence of commodities as a widely accepted investible asset class from the mid-1990s to the cycle peak in 2008. Around 2012–13, the above-mentioned three member team concluded that BTC and other digital assets are likely to follow the same pattern as they represent a similar theme, which they summarised as the ‘three Ds’: 1) demand in the form of utility of digital assets beyond financial speculation; 2) depletion associated with Bitcoin’s periodic halving (see our Edison Explains piece for details); and 3) the dollar, that is deteriorating confidence in fiat currencies following the global financial crisis (GFC) in 2008 and the accommodative monetary policy of the Federal Reserve and other major central banks ever since.

Offering a wide range of digital asset ETPs and a blockchain equity ETF

CS has been a pioneer in the digital asset space (see our initiation note for details) with the first regulated BTC hedge fund (co-managed by Daniel Masters and Jean-Marie Mognetti) introduced by Global Advisors in April 2014. CS’s current product suite in its asset management vertical can be divided into three groups:

XBT Provider Trackers (c £878m AUM at end-2022, see Exhibit 2): CS’s legacy products (launched in 2015 and 2017), which are based on synthetic replication of the underlying asset through a combination of physical digital assets (at least 75% of the exposure) and derivatives (futures and options in particular) held by CS’s subsidiary. Consequently, they share some characteristics of a structured product with counterparty risk.

CoinShares Physical ETPs (c £$129m AUM at end-2022): launched in 2021, CoinShares Physical ETPs use physical replication (notes are issued only on receipt of the respective physical digital asset), with digital assets custodied by Komainu (see the ‘Principal investments’ section for details). The underlying assets are kept in bankruptcy-remote special purpose vehicles (SPVs), which is a structure preferred by institutional investors (especially after the GFC) as it removes counterparty risk.

Blockchain equities ETFs (c US$434m AUM at end-2022): in July 2021, CS acquired the ETF index business from Elwood Technologies, including the index creation and management activities related to the Invesco Elwood Global Blockchain Equity UCITS ETF (renamed subsequently to Invesco CoinShares Global Blockchain UCITS ETF).

Moreover, CS has designed and maintained the CoinShares Bitcoin Hourly Reference Rate, an index that is used, for example, by the Invesco Physical Bitcoin ETP. CS also launched the CoinShares Equally Weighted Crypto Index, offering exposure to the five most liquid digital assets.

Exhibit 2: Overview of CS’s current ETP/ETF offering

Product

Underlying asset

AUM at end-2022 (US$m)

Inception date

Mgmt fee

Staking reward

Trading currency

Exchanges

XBT Provider

 

 

 

 

 

 

 

Bitcoin Tracker One

BTC/US$

323

May-2015

2.50%

-

SEK

Sweden, Germany (Stuttgart)

Bitcoin Tracker Euro

BTC/US$

177

Oct-2015

2.50%

-

Sweden, Germany (Stuttgart)

Ether Tracker One

ETH/US$

177

Oct-2017

2.50%

-

SEK

Sweden, Germany (Stuttgart)

Ether Tracker Euro

ETH/US$

294

Oct-2017

2.50%

-

Sweden, Germany (Stuttgart)

CoinShares Physical

 

 

 

 

 

 

 

Bitcoin ETP

BTC

169

Jan-2021

0.98%

-

US$, €, £, CHF

Switzerland, Germany, France, Netherlands

Ethereum ETP

ETH

89

Feb-2021

0.00%

-*

US$, €, CHF

Switzerland, Germany, France, Netherlands

Litecoin ETP

LTC

3

Apr-2021

1.50%

-

US$, €, CHF

Switzerland, Germany

XRP ETP

XRP

6

Apr-2021

1.50%

-

US$, €, CHF

Switzerland, Germany

Staked Polkadot ETP

DOT

1

Jan-2022

0.00%

5.00%

€, US$, CHF

Switzerland, Germany

Staked Tezos ETP

XTZ

2

Jan-2022

0.00%

3.00%

€, US$

Germany

Staked Cardano ETP

ADA

2

Mar-2022

0.00%

3.00%

€, US$

Switzerland, Germany

Staked Solana ETP

SOL

11

Mar-2022

0.00%

3.00%

€, US$

Switzerland, Germany

Chainlink ETP

LINK

0.4

May-2022

1.50%

-

Germany

UniSwap ETP

UNI

0.5

May-2022

1.50%

-

Germany

Staked Cosmos ETP

ATOM

1

Jun-2022

0.00%

5.00%

Germany

Staked Matic ETP

MATIC

1

Jun-2022

0.00%

5.00%

Germany

Staked Algorand ETP

ALGO

3

Jul-2022

0.00%

2.00%

Germany

Invesco CoinShares Global Blockchain UCITS ETF

Index**

434

Mar-2019

0.65%

N/A

US$, €, £, ILS and MXN

UK, Germany, Switzerland, Italy, Ireland, Mexico, Israel***

Source: CoinShares data. Note: *CoinShares Physical Ethereum ETP does not offer a staking yield currently but we believe it will be introduced following a successful Shanghai upgrade on the Ethereum network (see below for details) **CoinShares Blockchain Global Equity Index. ***The ETF also has a feeder fund in Thailand and two self-replication funds in Japan (which basically operate in a similar way to feeder funds).

Proprietary capital markets infrastructure as an enabler

The CoinShares Capital Markets (CSCM) division, which traded US$10.9bn of notional value during the 12 months to end-September 2022, began as the algorithmic trading arm of the Global Advisors Group (see above) and has been trading in spot and derivative crypto markets since 2014. CS’s infrastructure, connecting ‘analogue’ and digital finance (which now offers connectivity to more than 30 counterparties), was initially built primarily to facilitate a tight bid-ask spread and liquidity for its XBT Provider Trackers. The connectivity network and infrastructure layer that CS has developed over time allows it to deploy its algorithms to both support the asset management platform (eg liquidity provisioning for the XBT Provider Trackers) and execute a variety of trading strategies.

CS has followed a few core principles in developing its infrastructure trading division: 1) all activities should be algorithm-driven (ie minimising manual trading); 2) the technology is utilised exclusively for its own internal purposes (CS has no interest in becoming an OTC broker, although it started allowing some third parties to use its technology as a white-label solution and interact directly with their flow); and 3) CS does not carry out any directional trading but focuses on exploiting market inefficiencies through delta-neutral strategies (statistical arbitrage strategies in particular). CSCM is also active in fixed-income investments, mostly digital asset reverse repurchase agreements, with its counterparties including, for example, hedge funds and family offices. Finally, it is active in the DeFi space, mostly as a lender in decentralised lending protocols. As illustrated in Exhibit 3, CSCM generated a profit throughout FY18 to FY21 during both bull and bear markets, while its FY22 results were burdened by two one-time events (see the forecast section below for details).

Exhibit 3: Income and gains – CoinShares’ capital markets infrastructure division

£m

FY18

FY19

FY20

FY21

FY22

Liquidity provisioning

8.2

2.3

4.2

13.8

4.5

Delta neutral trading strategies

0.7

5.4

7.6

27.2

2.6

Fixed income activities

0.6

0.9

3.8

10.9

5.0

DeFi

-

-

-

3.6

13.9

Other & exceptional items

4.8

0.8

1.3

5.8

(43.3)*

TOTAL

14.4

9.4

16.8

61.2

(17.4)

BTC price change in US$

-73%

88%

305%

60%

-64%

ETH price change in US$

-82%

-5%

476%

399%

-67%

Source: CoinShares data, Refinitiv. Note: *Includes exceptional losses on Terra/LUNA and FTX.

Principal investments to drive products/services distribution

CS also invests from its own balance sheet in early-stage technology companies and channels to facilitate the distribution of its products and services. Together with some minor proprietary investments in digital assets and other receivables, its principal investment portfolio was valued at £47.3m at end-2022. Its current major holdings include:

FlowBank: a Swiss-based online neo bank launched in Q121; it currently offers more than 50,000 financial products such as stocks, bonds, commodities, ETFs, forex and contracts for differences (CFDs) to both retail and institutional clients on its investment platform. CS holds a 29.3% stake (accounted for using the equity method and valued at £30.1m at end-2022), which represents voting rights equal to 32.06% (which accounts for CS’s follow-on investment of £20.3m during FY22). CS is also planning to provide its tech stack to allow FlowBank’s customers to directly trade in digital assets.

Komainu: a digital assets custodian (in which CS held a 14.24% stake as disclosed in its 2022 issue prospectus) regulated by the Jersey Financial Services Commission (JFSC) and established in 2018 as a joint venture between CS, Ledger (a digital asset security specialist and a top player in custody hardware) and Japanese investment bank Nomura. The company is undertaking a funding round that was initiated in late 2022, with a significant tranche closed in early 2023 (leading to a revaluation of CS’s stake from £2.3m to £7.3m during 2022).

3iQ (carrying value of the 9.85% stake at £1.9m at end-2022): the largest Canadian digital assets manager, founded in 2012, with AUM of US$458m as at end-2022 across four listed products, including two ETFs launched with CS in March/April 2021, as well as its Bitcoin Fund and Ether Fund (launched in April and December 2020, respectively). Moreover, 3iQ manages two private funds for accredited investors (3iQ Global Cryptoasset Fund set up in April 2018 and 3iQ Digital Yield Fund launched in January 2022).

Strategy: Staying innovative and light touch

The CS team positions itself to benefit from the way that blockchain technology will disrupt the global financial industry. Its management believes that in the long run, all financial assets will exist in digital form and be traded in a unified 24/7 global market. CS’s vision is to be ahead of the curve in introducing innovative, tech-driven financial products and services to a broad institutional and retail investor audience through a business model based on a combination of platforms making use of its talent pool of tech engineers and financial professionals (CS’s overall headcount at end-2022 was 90). It aims to expand in a capital-efficient manner by staying low-touch and tech-focused, scaling through API integrations and connectivity. It pursues a ‘driverless bank’ approach, which means leveraging automation and programmatic execution to reduce cost and systemic risk, while improving efficiencies of on-chain transactions. Moreover, it puts emphasis on assuring it is investing in its tech infrastructure and risk management systems to exploit trends such as 1) the shift of services to mobile devices, providing more direct access to customers seeking payments, lending and other financial services, and 2) blockchain enabling the emergence of an open and interoperable platform, changing the way clients consume financial services.

Overall, CS’s long-term strategic priority is to leverage its proprietary tech infrastructure to be a provider of 1) asset management solutions (B2B2C, such as its existing XBT Provider and CoinShares Physical platforms) deriving revenues from fees charged on AUM and 2) business solutions (B2B) with a licensing model (platform-as-a-service).

In late 2021, CS acquired Napoleon, a French crypto-focused fintech company, which offered, among others, pre-built portfolios and algorithmic trading strategies. CS considered the acquisition of Napoleon as an important step into the B2C, subscription-based business model providing direct access to customers, thus allowing CS to better understand their needs and drive an enhanced user experience. However, the FTX collapse in November 2022 had a significant impact on CS’s ability to deploy its B2C offering in Europe, as FTX had a 75% market share in derivatives trading in Europe following Binance’s shutdown of its derivatives marketplace in the region. Consequently, CS decided to wind down its B2C business, redeploying its human resources to its two existing core verticals.

The company’s long-term growth will be driven by a combination of 1) in-house, ‘organic’ project development to build its own IP (eg CoinShares Physical or CSCM), 2) partnerships providing faster go-to-market and lower opportunity costs (eg Komainu, ETFs launched with 3iQ) and 3) M&A to consolidate new capabilities immediately (eg the acquisition of Elwood’s index business).

Management

CS’s board of directors consists of Daniel Masters as non-executive chairman (he is also the largest shareholder with a 22.44% stake), Jean-Marie Mognetti and four independent non-executive directors: Christine Rankin, Johan Lundberg, Carsten Køppen and Viktor Fritzén. CS’s management team is made up of seven members:

Jean-Marie Mognetti (CEO) is an experienced commodities trader with a background in quantitative analysis, risk management and alpha-generation through macro commodity-oriented trading programmes, including cryptocurrencies. He is one of the company’s co-founders and major shareholders with a 17.44% stake (at 14th February 2023).

Richard Nash (CFO) is a chartered accountant with more than 10 years’ experience. He joined CS in 2019 from Cairn Financial Advisors, where he acted as a nominated adviser to several listed companies, holding the position of a qualified executive (granted by the London Stock Exchange).

Meltem Demirors (chief strategy officer) is a prominent cryptocurrency advisor, advocate and investor who joined the management board in 2018, prior to which she was vice president of development at Digital Currency Group, one of the key players in the digital assets space and the owner of Grayscale Investments, the largest digital assets manager globally. She holds a 4.08% stake in CS.

Frank Spiteri (head of asset management) joined CS in 2020 and has over 10 years’ experience as an ETP specialist. He was previously head of distribution and capital markets at WisdomTree. Prior to his career in the ETP industry, he was an equity and equity derivatives trader with KBC Financial Products for 11 years.

Graeme Dickson (group general counsel) has c 15 years’ experience as an English qualified solicitor and joined CS in 2019 from Aviva where he was senior legal counsel. He also held positions at Linklaters, White & Case, Bank of America and Standard Bank.

Benoît Pellevoizin (head of marketing & communications) has 15 years’ experience in developing marketing, communications, advertising and branding. He joined CS from Ledger. Prior to that he held positions involving strategy, branding and innovation with Ogilvy Consulting, SID LEE, M&CSAATCHI, Fred & Farid and Digitas.

Pierre Porthaux (head of trading technology) has close to 20 years’ experience in finance in both traditional markets and cryptocurrencies. Prior to joining CS, he co-founded Blockchain Solutions (a technology and strategy consulting company) and Emergence Labs (a business focused on bitcoin trading technology), both located in Paris. Before that, he was a trader undertaking statistical and index arbitrage strategies for banks and hedge funds.

Market outlook

Despite the recent crypto winter, we remain optimistic towards the long-term prospects of the digital asset space. This stance is underpinned by the following factors (discussed in detail in our recent thematic piece):

Major crypto downturns like the one in 2022 occur regularly, being the manifestation of this relatively young industry’s inherent higher volatility.

Except for the quite experimental Terra/LUNA project, major project failures in 2022 were primarily associated with centralised entities (such as exchanges, brokers, hedge funds and lending platforms) rather than DeFi projects, which we consider one of the core value propositions of permissionless blockchains.

We saw continued technological progress in the sector, such as Ethereum’s ‘Merge’ and the first projects connecting the on-chain environment to real-world assets (eg real estate, trade receivables and commercial loans).

Well-known companies and institutions have embarked on initiatives utilising permissionless blockchains: NFTs (eg Twitter, Nike, Warner Music Group, Starbucks), financial asset tokenization (eg Siemens, KKR, Monetary Authority of Singapore) and payments (eg Chipotle, Mastercard, Apple, Stripe).

There is growing acceptance among retail and institutional investors (digital assets being ‘too big to ignore’), even if adoption rates and sentiment towards cryptocurrencies vary greatly by investor groups. For instance, we believe that BTC is increasingly considered an asset sensitive to interest rates – a more volatile version of gold.

Nevertheless, we are also mindful of the extent of the turmoil in 2022 and the high-profile failures of key centralised industry players and their impact on the digital asset adoption path. We acknowledge that near-term adoption may be dampened by low market liquidity and gaps in infrastructure left by the collapse of some service providers (eg Silvergate Bank). We now expect average global spot allocations to digital assets of 1.8% and 2.5% in 2026 and 2030, respectively (vs 2.2% and 2.5% at the time of our initiation). This compares with c 1% at end-2021 and c 0.5% currently, according to our estimates. Given the complexity associated with storing, trading and reporting digital asset investments, we expect the share of ETPs in total digital asset allocation to be higher than for gold (which is c 2%) and therefore assume a gradual increase from the c 2.3% at end-2022 to around 4% by 2030. As a result, we forecast that digital asset ETP AUM in Western Europe will reach US$26.6bn and US$50.4bn by 2026 and 2030, respectively (see Exhibit 4), compared to US$43.9bn and US$60.1bn at the time of our initiation.

Our forecasted financial assets excluding currency and deposits are based on financial wealth figures for 2021 and projections for 2026 from Boston Consulting Group’s (BCG’s) Global Wealth 2022 report published in June 2022 (2022–25 estimates calculated based on the CAGR implied by BCG’s 2026 forecast, while 2027–30 estimates assume the same CAGR as in the period 2021–26). We then remove from these financial wealth figures the part which is allocated to currency and deposits, estimated based on 2021 country-level data from the OECD (includes OECD members only) and weighted by each country’s 2021.

Exhibit 4: Forecast digital assets allocation globally and in Western Europe

US$tn unless otherwise stated

2021

2022

2023e

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Financial assets excluding currency and deposits

197.1

206.9

217.2

227.9

239.3

251.2

263.6

276.7

290.5

304.9

Digital assets allocation (%)*

1.1%

0.4%

0.7%

1.0%

1.6%

1.8%

2.0%

2.2%

2.3%

2.5%

Digital assets allocation (global)*

2.1

0.7

1.4

2.3

3.8

4.5

5.3

6.0

6.8

7.6

Financial assets excluding currency and deposits

35.6

36.7

38.2

39.7

41.3

43.0

44.7

46.5

48.4

50.4

Digital assets allocation (%)**

1.1%

0.4%

0.7%

1.0%

1.6%

1.7%

1.9%

2.1%

2.3%

2.5%

Digital assets allocation (Western Europe)**

0.4

0.1

0.2

0.4

0.7

0.8

0.9

1.0

1.1

1.3

% of allocation to ETPs

2.6%

2.3%

2.4%

2.8%

3.2%

3.5%

3.9%

3.9%

4.0%

4.0%

AUM of Western European crypto ETPs (US$bn)

9.7

3.1

6.0

11.1

20.9

26.6

33.4

38.3

43.9

50.4

Source: Edison Investment Research. Note: *Adjusted for the value of lost BTC (3m coins according to Glassnode estimates). **Assuming allocation in line with global allocation.

CS remains the largest issuer of crypto ETPs by AUM in Europe

CS is still by far the largest European digital asset ETP issuer, with a c 44% market share by AUM as at end-2022, according to our estimate (see Exhibit 5). This represents a moderate decline from c 50% at end-2021, which was driven by continued redemptions of CS’s legacy XBT Provider units (leading to net outflows in 2022 of US$446m), likely on the back of profit taking from early BTC and ETH investors (as discussed in our previous notes). However, the CS Physical product suite saw at the same time inflows of c US$142m (excluding seed assets). This includes US$17.2m in Q422, which, according to CS’s calculations, represented a 48% market share in terms of net inflows captured across the European market in Q422. Beyond Europe, CS is the second-largest digital assets firm after the undisputable leader Grayscale Investments, which had US$14.6bn in AUM at end-2022 across its US OTC-listed trusts. Here, we note that the overall market for financial products is much larger in the United States compared to Europe.

CS’s blockchain equity ETF business represented AUM of US$640m as at 17 February 2023, positioning it as the leader in ETFs with exposure to blockchain companies, with the second player having AUM of c US$450m, according to CS’s weekly funds flow report (see Exhibit 6).

Exhibit 5: AUMs of major European issuers of digital asset ETP as at end-2022 (US$m)

Exhibit 6: AUMs of major US and European ETFs with exposure to blockchain companies as at 17 February 2023 (US$m)

Source: CoinShares data, Bloomberg; Note: *ETP holders payable on the company’s balance sheet as at end-June 2022 (last available data).

Source: CoinShares Digital Asset Fund Flows Weekly

Exhibit 5: AUMs of major European issuers of digital asset ETP as at end-2022 (US$m)

Source: CoinShares data, Bloomberg; Note: *ETP holders payable on the company’s balance sheet as at end-June 2022 (last available data).

Exhibit 6: AUMs of major US and European ETFs with exposure to blockchain companies as at 17 February 2023 (US$m)

Source: CoinShares Digital Asset Fund Flows Weekly

As discussed in our initiation note, CS’s first-mover advantage allowed it to introduce the XBT Provider Trackers with a high 2.5% management fee pa, while its CoinShares Physical Bitcoin ETP charges a fee of 0.98% pa. Until recently, its CoinShares Physical Ethereum ETP charged a 0.98% fee as well, but CS reduced it to 0.00% starting from 1 February 2023 in anticipation of the Shanghai upgrade on the Ethereum network. This upgrade will enable withdrawals of staked ETH, therefore allowing CS to freely stake and un-stake ETH held on behalf of the CoinShares Physical ETP. We expect CS to introduce a fixed percentage staking reward for this ETP soon (similar to its other ETPs investing in native tokens of proof-of-stake (PoS) blockchains, see Exhibit 2). We believe that the excess staking rewards it will retain may be in excess of the forfeited management fee (see below).

Most of the BTC and ETH ETPs of CS’s major European competitors charge management fees of c 0.75–1.50% (see Exhibits 7 and 8). While some more recent entrants offer products at even lower fees, it has not allowed them to significantly increase their AUM, at least for now. In the long term, as single-asset BTC and ETH ETPs become a more commoditised product, we expect their management fees to gravitate towards levels common for precious metals ETPs, which stand at c 0.00–0.40% for most major providers (see the initiation note for a detailed discussion). In the case of ETH, some competitors may at some stage also reduce the fees on their ETPs providing exposure to native tokens of PoS blockchains and instead retain some of the staking rewards.

Exhibit 7: Comparison of major European bitcoin ETPs

Exhibit 8: Comparison of major European Ether ETPs

Source: CoinShares data, Edison Investment Research. Note: *White-label solution from HanETF. **The company also offers a bitcoin ETP with a reduced fee (0.21%), which can participate in yield generation from collateralised lending (21Shares Bitcoin Core ETP). Its AUM at end-2022 was minor at US$1.5m. ***Edison estimate as at end-October 2022.

Source: CoinShares data, Edison Investment Research . Note: *The company also offers an Ether ETP with a reduced fee (0.21%), which can participate in yield generation from collateralised lending (21Shares Ethereum Core ETP). Its AUM at end-2022 was minor at US$0.4m. **White-label solution from HanETF. ***Edison estimate as at end-October 2022.

Exhibit 7: Comparison of major European bitcoin ETPs

Source: CoinShares data, Edison Investment Research. Note: *White-label solution from HanETF. **The company also offers a bitcoin ETP with a reduced fee (0.21%), which can participate in yield generation from collateralised lending (21Shares Bitcoin Core ETP). Its AUM at end-2022 was minor at US$1.5m. ***Edison estimate as at end-October 2022.

Exhibit 8: Comparison of major European Ether ETPs

Source: CoinShares data, Edison Investment Research . Note: *The company also offers an Ether ETP with a reduced fee (0.21%), which can participate in yield generation from collateralised lending (21Shares Ethereum Core ETP). Its AUM at end-2022 was minor at US$0.4m. **White-label solution from HanETF. ***Edison estimate as at end-October 2022.

More sophisticated ETPs will become more important

In line with our predictions outlined in the initiation note, the crypto ETP market in Europe has been gradually expanding beyond plain vanilla BTC and ETH ETPs to single-asset ETPs investing in other digital assets, products offering a yield to investors (either from staking or digital asset lending), as well as multi-asset products. Having said that, this process has been gradual and has been affected by the ‘crypto winter’ in 2022. BTC and ETH ETPs still made up 50% and 29% of total digital asset ETP AUM at end-2022, respectively, followed by other single-asset ETPs at 16% and multi-asset ETPs at 6% (according to our calculations).

Financials

Income statement shaped by digital assets accounting

CS’s financial statements are influenced by the current accounting treatment of digital assets as intangible assets under IFRS. CS records digital assets (including those held to hedge its liability to ETP investors) under current assets as a separate line item, held at fair value through the revaluation model. Consequently, unrealised gains and losses on these holdings arising from the movements in digital asset prices are recognised within other comprehensive income (unless reversing previously recognised gains). At the same time, changes in the value of CS’s liability to its ETP holders is recognised as an income or expense within the P&L. This also applies to non-leveraged, digital asset-backed products such as ETPs (which are recorded under trade receivables on CS’s balance sheet) used to hedge the liability related to XBT Provider products. The above accounting policies significantly distort CS’s reported net income. Therefore, we consider CS’s adjusted EBITDA and total comprehensive income as more meaningful performance measures, as these reflect the movements in the value of both digital assets and the liability to ETP holders (see Exhibit 9).

Exhibit 9: Summary of key items from CS’s statement of comprehensive income

£m, unless otherwise stated

FY18*

FY19*

FY20*

FY21

FY22

Revenue, of which:

10.5

11.3

18.4

80.8

51.5

XBT Provider

10.5

11.3

18.4

78.3

46.0

CoinShares Physical

-

-

-

0.9

2.3

Equities platform

-

-

-

1.2

1.9

B2C

-

-

-

0.3

0.9

CSCM

-

-

-

0.1

0.4

Capital market infrastructure income/gains, of which:

14.4

9.4

16.8

61.2

(17.4)

Principal investment gains/(losses)

(1.1)

(0.4)

1.0

9.9

(4.9)

Administrative expenses excl. D&A

(10.9)

(9.1)

(14.1)

(30.8)

(35.3)

Adjusted EBITDA

13.0

11.2

22.1

121.1

(6.5)

Adjusted EBITDA margin

54.4%

55.0%

61.1%

79.7%

N/A

Depreciation and amortization

(0.0)

(0.2)

(0.2)

(1.3)

(2.9)

Finance expense

(0.1)

(0.4)

(1.2)

(7.0)

(6.4)

Income taxes

(0.2)

(0.3)

(0.4)

(1.1)

(0.5)

Currency translation differences

1.8

(1.4)

(1.9)

1.8

19.3

Total comprehensive income

14.4

8.9

18.4

113.4

3.0

Source: CoinShares data; Note: *Prepared in accordance with FRS 102 (the financial reporting standard applicable in the UK and Republic of Ireland). FY21 and FY22 prepared in accordance with IFRS.

We also note that fees on CS’s XBT Provider Trackers are accrued in euros and Swedish krona but hedged to the US dollar (which is CSCM’s reference currency). Hence CS’s consolidated accounts are subject to FX risk arising from changes in the £/US$ rate (given that CS reports its results in sterling while most of its activities are carried out in US dollars).

CSCM affected by two major events in 2022

CS’s market neutral approach allowed it to generate a profit between 2018 and 2021 irrespective of the stage of the market cycle. In 2022, its CSCM’s results were burdened by two events affecting the broad digital asset space: the collapse of the Terra/LUNA protocol in May (resulting in an exceptional loss of £17m for CS, see our previous update note for details) and the collapse of FTX and Alameda Research in November (leading to a full write-down of CS’s £26m assets held at the FTX exchange). This demonstrates that, while CS’s strategies are non-directional, the company is still exposed to some inherent risks associated with the early development stage and unregulated nature of parts of the current digital asset ecosystem. CS’s management highlighted that it is putting emphasis on further strengthening its risk management framework and has elected to amend its approach to counterparty risk, placing the vast majority of digital assets held in its CSCM activities with regulated digital asset custodians (FTX was an unregulated exchange).

While industry-wide impacts from further high-profile bankruptcies cannot be ruled out, we assume that CSCM will return to generating a profit from its various capital markets activities given the one-off nature of the loss triggers in 2022 (see Exhibit 10). We conservatively assume that CSCM will generate a return on its trading strategies of c 9% pa in the long run, though we factor in a higher return in the next few years on the back of resumed interest in digital assets from various investor groups at a still early adoption stage.

Exhibit 10: Income and gains – CS’s capital markets business

£m

FY20

FY21

FY22

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

Liquidity provisioning

4.2

13.8

4.5

2.6

6.6

5.1

6.0

6.1

6.0

6.3

6.9

Delta neutral strategies

7.6

27.2

2.6

7.6

11.7

16.6

13.2

15.0

16.2

17.1

17.4

Fixed income activities

3.8

10.9

5.0

5.0

5.1

5.1

5.2

5.2

5.3

5.3

5.4

DeFi

0.0

3.6

13.9

4.6

7.7

13.2

13.7

14.2

14.8

15.4

16.0

Other & exceptional items

1.3

5.8

(43.3)

1.1

1.1

1.1

1.1

1.1

1.1

1.1

1.1

TOTAL

16.8

61.2

(17.4)

20.9

32.1

41.0

39.2

41.7

43.4

45.2

46.8

Source: CoinShares data, Edison Investment Research

AUM growth to benefit from resumed digital assets adoption

In our base scenario, we assume continued outflows from the legacy XBT Provider products (as a result of profit taking and investors switching to products with a lower management fee), though initially offset by a recovery in digital asset prices during the next bull run. Meanwhile, CoinShares Physical ETPs should further strengthen its market position and benefit from the industry-wide pick-up in fund inflows. Over time, this should increasingly apply to products beyond BTC and ETH ETPs (which, however, will remain a core part of the sector’s offering). We assume that CS will launch at least one multi-asset ETP in 2024, which will build mass over subsequent years. Here, we note that the launch of such a product (based on CS’s cooperation with Imperial College London’s Centre for Cryptocurrency Research and Engineering) was heralded by the management back in late 2021 but has not materialised yet and management has not provided an updated roadmap for the product. We expect CS’s ETP AUM to increase from c US$1.22bn at end-2022 to US$6.8bn at end-2026 and US$10.6bn by 2030. This compares with c US$4.5bn at end-2021. We also anticipate that CS will be able to substantially grow its blockchain equity ETF AUM from US$525m at end-2022 to US$1.6bn in 2026 and US$2.9bn in 2030, with a 2022–30 CAGR of c 24%.

Exhibit 11: CS’s historical and forecast AUM growth (US$m)

Source: CoinShares data, Edison Investment Research. Note: £/US$ rate assumed at c 1.20 throughout the forecast period.

As a result of the changing product mix (in favour of CoinShares Physical ETPs, which charge lower fees), as well as an industry-wide decline in management fees (see above), we expect to see the average management fee on CS’s ETPs decline from c 2.18% at end-2022 to 0.64% by 2030. At the same time, we have started factoring in the income from staking rewards (in excess of what is distributed to ETP holders) for the CoinShares Ethereum ETP and prospective single- and multi-asset products (see Exhibit 12). We assume that CS will generate 150bp of staking yield over what is distributed to the holders of its CoinShares Ethereum ETP.

Exhibit 12: Forecast average management fee rate and excess staking yield

Source: CoinShares data, Edison Investment Research. Note: Excess staking yield is defined as total staking yield generated by CS from digital assets held on behalf of ETP holders less staking rewards distributed to ETP holders.

As a result of the above assumptions, we arrive at the EBITDA forecasts presented in Exhibit 13. We forecast an EBITDA recovery to c £25.2m and £41.0m in FY23 and FY24, respectively, and close to double over our forecast horizon (with an EBITDA margin settling at around 53–54%).

Exhibit 13: CS’s EBITDA and EBITDA margin development

Source: CoinShares data, Edison Investment Research. Note: *Calculated as asset management revenue less all administrative expenses excluding D&A divided by asset management revenue.

Balance sheet remains robust despite FY22 loss

As at end-2022, CS had a net amount due from brokers of £98.1m versus £173.7m net due to brokers at end-2021. The more muted activity within its capital markets infrastructure business in H222 meant that CS significantly reduced the utilisation of its credit lines with brokers, which resulted in a lower interest expense. However, these credit facilities remain available and can be drawn by CS as new trading opportunities arise. CS also had cash at bank of £26.6m at end-2022. Finally, based on our discussion with CS’s management, we understand that its accrued management fees related to XBT Provider (which will be released in cash to CS once investors redeem their units) stood at c US$166m (c £137m) at end-2022. Given the above and its total equity of £204.0m as at end-2022, we believe CS’s balance sheet is in a good position. CS’s confidence in its balance sheet is somewhat illustrated by the small £0.4m share buyback it performed in 2022 (and it has resumed share buybacks in Q123).

Valuation

We value the company’s shares using a discounted cash flow (DCF) approach (Exhibit 14). Given that we are in the initial stage of digital assets adoption, we have applied an extended detailed forecast horizon to FY30. We have used CS’s approach to calculating adjusted EBITDA, but for the purposes of our valuation we remove any income and gains in CSCM arising from earlier income/gains recycled back into the trading activity (in order to avoid double-counting of cash flows). Our DCF is sensitive to the change in working capital associated with accrued management fees on the XBT Provider Trackers (see our initiation note for details).

We have applied a conservative weighted average cost of capital of 13.3% (which represents a 30%+ premium to the broader market average) to account for the sensitivity of our forecasts to the price movements of digital assets, as well as risks to our digital asset adoption scenario. We further assume a 2.0% residual growth rate. We account for CS’s principal investments (including digital assets) in line with the last reported fair value at end-2022 of £47.3m. Conservatively, we have not pencilled in any gains on principal investments. As a result, we arrive at a fair value per share of SEK77.4, which implies a 150% upside potential to the current share price. Exhibit 15 shows our valuation sensitivity to different WACC assumptions.

Exhibit 14: CS’s DCF valuation model

£m, unless otherwise stated

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

EBITDA*

26.9

42.6

65.7

72.7

77.5

80.4

83.3

82.2

Interest expense

(4.7)

(7.7)

(7.8)

(7.9)

(9.0)

(10.5)

(11.3)

(12.1)

CSCM income/gains adjustment

0.0

(1.7)

(6.6)

(9.3)

(11.1)

(12.3)

(13.6)

(14.5)

Income taxes

(0.2)

(0.4)

(0.6)

(0.7)

(0.7)

(0.8)

(0.8)

(0.8)

Change in working capital

(11.1)

2.5

(13.7)

(17.3)

(12.8)

16.2

61.3

65.3

Capex

(2.3)

(2.4)

(2.5)

(2.5)

(2.6)

(2.7)

(2.8)

(2.8)

Free cash flow to firm (FCFF)

8.5

32.9

34.4

35.0

41.3

70.4

116.0

117.2

Discounted FCFF

7.5

25.6

23.7

21.3

22.1

33.3

48.5

43.2

WACC

13.3%

 

 

 

 

 

 

 

Residual growth rate

2.0%

 

 

 

 

 

 

 

Sum of DFCFF

225.1

 

 

 

 

 

 

 

Residual value

149.4

 

 

 

 

 

 

 

Principal investments

45.0

 

 

 

 

 

 

 

Digital assets

2.3

 

 

 

 

 

 

 

Enterprise value

421.8

 

 

 

 

 

 

 

Net debt/(cash) at end-2022

(3.4)

 

 

 

 

 

 

 

Equity value

425.2

 

 

 

 

 

 

 

Share count (fully diluted)

72.2

 

 

 

 

 

 

 

Fair value per share (£)

5.9

 

 

 

 

 

 

 

£/SEK

12.6

 

 

 

 

 

 

 

Fair value per share (SEK)

77.4

 

 

 

 

 

 

Current share price (SEK)

31.0

 

 

 

 

 

 

 

Upside/(downside)

150%

 

 

 

 

 

 

 

Source: CoinShares data, Edison Investment Research. Note: *Adjusted for non-cash share-based payments.

Exhibit 15: CS’s valuation sensitivity to WACC assumption

WACC

10.4%

11.4%

12.4%

13.4%

14.4%

15.4%

16.4%

Fair value per share (SEK)

102.0

92.2

84.1

77.4

71.8

66.9

62.7

Source: Edison Investment Research

We have not identified any close listed comparators for CS for which complete consensus figures are available. Having said that, an additional reference point for our CS valuation may be the fact that CS’s gross cash at end-2022 and XBT Provider fees accrued to date are equal to c 100% of CS’s current market capitalisation, according to our estimates. If we also include CS’s net amounts due from brokers, this increases to 159%.

Sensitivities

Digital asset prices

Our base case valuation of CS remains conditional on a continued increase in average portfolio allocations to digital assets in the coming years as the asset class establishes itself as an inherent (even if small) part of most diversified portfolios. Given the limited supply of new digital assets (BTC and ETH in particular), we expect the above to translate into a visible increase in digital asset prices (our model implies a BTC and ETH price of c US$115,000 and US$12,000 by 2030, respectively).

Having said that, digital asset are very hard to value (as discussed in our Edison Explains piece) and it is difficult to gauge the extent to which the value of a blockchain network should be reflected in the market capitalisation of its native token. Hence, predicting the exact prospective price path for digital assets is quite challenging. Consequently, we have decided to present a summary of our forecasts and valuation for CS in a scenario in which digital asset prices grow in line with the European Central Bank’s and Federal Reserve’s inflation target of 2% from the current level (ie BTC at c US$28,000 and ET at c US$1,800). Under this more cautious scenario, we value CS at SEK33.9 per share. In Exhibit 16, we present a summary of our forecasts assuming stable digital asset prices.

Exhibit 16: Summary forecasts in a ‘2% pa price growth’ scenario

£m unless otherwise stated

FY20

FY21

FY22

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

Digital assets allocation (%)

0.4%

1.1%

0.4%

0.6%

0.5%

0.5%

0.5%

0.5%

0.5%

0.5%

0.5%

Digital assets allocation (US$tn)

0.67

2.11

0.7

1.2

1.2

1.2

1.3

1.3

1.3

1.4

1.4

CoinShares total AUM

2,317

6,075

1,864

2,716

3,043

3,362

3,725

4,130

4,401

4,741

5,158

Fee revenue

18.4

80.8

51.5

35.8

34.0

31.9

31.2

31.6

31.4

29.9

28.4

CSCM income/gains

16.8

61.2

(17.4)

20.9

25.4

24.4

25.7

27.7

29.7

32.2

35.0

Administrative expenses excluding D&A

(14.1)

(30.8)

(35.3)

(34.0)

(35.2)

(35.0)

(34.9)

(34.9)

(34.7)

(35.5)

(36.5)

Adjusted EBITDA

22.1

121.1

(6.5)

22.7

24.2

21.4

22.1

24.4

26.4

26.6

26.9

Source: CoinShares data, Edison Investment Research

Other sensitivities

We have also identified other factors that may affect CS and our base case scenario:

Digital assets adoption path: our addressable market forecast relies on the assumption of a continued increase in the allocation of global financial wealth to digital assets. We note that the adoption trajectory is difficult to predict (especially given the difficulty in valuing digital assets) and our forecast may prove too conservative or too aggressive. Specifically, while we consider it unlikely, there is a risk that in the long run BTC and other cryptocurrencies will fail as an asset class and that current growing interest proves to be temporary. We consider the main adoption hurdles to be 1) the still unclear regulatory environment (albeit gradually improving, eg in Europe with the MiCA regulation), 2) difficulty in estimating a fundamental value of digital assets, 3) liquidity in some product groups (eg derivatives) and 4) lack of access to preferred structures, for example a spot bitcoin ETF in the US (though CoinShares Physical ETPs are a good example of structures available in Europe that are well suited to institutional investors). However, we believe that even if individual digital assets are eventually rejected by the investor community, the advantages of a global seamless blockchain-based financial infrastructure will encourage asset tokenisation (see our Blockchain adoption report for details). This would create a market in which experienced players with robust trading infrastructure such as CS can thrive.

Crypto contagion from recent high-profile failures: digital asset markets were shaken by a series of bankruptcies of major centralised entities operating in the sector (see our recently published thematic piece for details), and further contagion from the recent high-profile failures would likely have a significant impact on the sentiment and financial condition of the digital asset industry.

Competitive pressure in the crypto ETP market: although CS is the largest European digital asset firm, it needs to remain innovative in terms of new product launches to stay competitive. It launched several single-asset ETPs (including products with embedded staking rewards) but it is yet to launch a multi-asset ETP that could compete with similar existing products. We expect that the latter will materialise in the near term, potentially allowing CS to charge a higher management fee versus single-asset products. Failure to roll out new products would impair CS’s management fee revenue going forward.

Regulatory risks: while further regulatory clarity should help drive adoption, government policies and regulations may also pose a risk to sector growth if they are not aligned with the nature of the blockchain technology. We believe that this risk increased with the recent turmoil and fraud cases in digital asset markets, as illustrated by recent actions of the US Securities and Exchange Commission related to, for example, to the BUSD stablecoin and Kraken’s staking product.

XBT Provider redemption pattern: our discounted cash flow valuation is sensitive to the timing and volume of redemptions of the legacy XBT Provider ETPs and the accompanying release of cash fees. The lower (or higher) the redemption volume in the coming years, the lower (or higher) our free cash flow estimates and valuation. Interestingly, an abrupt bear market could, apart from offering CSCM more attractive trading opportunities, trigger a large redemption wave and provide a significant cash inflow for CS (although at the same time affecting future fee revenue).

Low free float: we note that the company’s free float currently stands at just 28.4%, which may affect the liquidity of the shares and the extent to which the stock price reflects CS’s intrinsic value.

Exhibit 17: Financial summary

Year ending 31 December
(£’000s unless otherwise stated)

FY18

FY19

FY20

FY21

FY22

FY23e

FY24e

FY25e

FY26e

FY27e

Income Statement

 

 

 

 

 

 

 

 

 

 

Revenues

10,549

11,331

18,389

80,755

51,484

37,803

49,994

73,935

91,827

100,333

Administrative expenses

(10,927)

(9,284)

(14,312)

(32,059)

(38,166)

(36,305)

(44,032)

(53,793)

(62,802)

(68,998)

Other operating income

4,811

529

607

14,665

16,599

17,429

18,300

19,215

20,176

21,185

Profit/(loss) on financial instruments

519,988

(64,553)

(1,398,436)

(2,483,773)

2,001,602

(867,340)

(1,052,531)

(1,810,526)

(653,772)

(659,110)

Realised gain/(loss) on investments

(1,074)

(405)

942

5,287

(2,800)

0

0

0

0

0

Adj. EBITDA

12,993

11,171

22,113

121,059

(6,521)

25,222

40,960

64,018

71,055

75,877

EBIT

523,347

(62,382)

(1,392,810)

(2,415,125)

506,719

15,227

29,311

49,509

56,575

60,860

Finance income

693

931

3,793

10,905

12,964

6,828

8,155

10,375

10,637

10,908

Finance expense

(148)

(404)

(1,191)

(7,045)

(6,373)

(4,711)

(7,734)

(7,799)

(7,852)

(9,021)

Pre-tax profit

523,892

(61,855)

(1,390,208)

(2,411,265)

513,310

17,344

29,732

52,085

59,360

62,747

Income taxes

(230)

(269)

(401)

(1,056)

(500)

(245)

(385)

(637)

(710)

(749)

Net income

523,662

(62,124)

(1,390,610)

(2,412,322)

512,810

17,099

29,347

51,448

58,650

61,998

Total comprehensive income

14,407

8,914

18,419

113,443

3,046

17,424

29,347

51,448

58,650

61,998

Adjusted EPS (diluted, £)*

N/A

N/A

0.28

1.62

0.04

0.26

0.43

0.75

0.86

0.91

DPS (£)

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

Balance Sheet

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

214

376

223

510

1,936

1,378

890

473

130

(137)

Digital assets

N/A

N/A

N/A

N/A

112

112

112

112

112

112

Intangible assets

0

7

20

19,781

11,992

11,119

10,246

9,373

8,500

7,627

Investments

6,158

5,585

3,626

24,501

45,020

45,324

45,324

45,324

45,324

45,324

Long term receivables and other

15

323

329

581

1,360

1,360

1,360

1,360

1,360

1,360

Non-current assets

6,387

6,290

4,199

45,372

60,420

59,293

57,932

56,642

55,426

54,286

Trade and other receivables

9,350

27,011

62,274

1,075,971

199,045

446,490

588,536

831,821

956,705

1,101,771

Digital assets

217,521

427,524

1,826,695

2,736,481

868,944

1,553,111

2,344,737

3,774,946

4,331,153

5,042,573

Cash at bank

32,897

2,350

2,266

11,088

26,565

22,629

36,618

44,833

75,590

124,537

Amounts due from brokers

N/A

39,405

66,518

118,976

233,507

290,011

440,950

721,446

828,771

967,424

Current assets

259,767

496,290

1,957,752

3,942,516

1,328,061

2,312,241

3,410,841

5,373,047

6,192,218

7,236,305

Total assets

266,154

502,580

1,961,951

3,987,888

1,388,480

2,371,534

3,468,773

5,429,689

6,247,644

7,290,591

Share capital

2,214

2,215

31

34

34

34

34

34

34

34

Share premium

111

111

2,387

30,781

30,781

30,781

30,781

30,781

30,781

30,781

Other reserves

104,322

168,813

1,209,630

667,846

(22,500)

(22,175)

(22,175)

(22,175)

(22,175)

(22,175)

Retained earnings

(68,003)

(125,795)

(1,155,551)

(497,727)

195,644

212,743

242,090

293,538

352,188

414,186

Total equity

38,644

45,343

56,497

200,934

203,959

221,383

250,730

302,178

360,828

422,826

Trade payables and other liabilities

227,469

419,340

1,792,936

3,491,612

1,025,734

1,933,409

2,999,663

4,907,797

5,637,898

6,581,119

Amounts due to brokers

N/A

37,631

112,121

292,708

135,385

193,341

194,978

196,312

225,516

263,245

Lease liabilities

0

0

0

0

581

581

581

581

581

581

Current tax liabilities

42

266

398

2,635

236

236

236

236

236

236

Current liabilities

227,510

457,237

1,905,454

3,786,955

1,161,937

2,127,567

3,195,459

5,104,927

5,864,232

6,845,181

Non-current liabilities

0

0

0

0

22,584

22,584

22,584

22,584

22,584

22,584

Total equity and liabilities

266,154

502,580

1,961,951

3,987,888

1,388,480

2,371,534

3,468,773

5,429,689

6,247,644

7,290,591

Ratios

 

 

 

 

 

 

 

 

 

 

Adj. EBITDA margin

52.1%

54.0%

62.8%

85.3%

-19.1%

43.0%

49.9%

55.7%

54.2%

53.4%

Adj. net margin

59.4%

38.4%

47.6%

79.9%

8.9%

29.7%

35.7%

44.8%

44.8%

43.7%

Source: Company accounts, Edison Investment Research. Note: *Total comprehensive income per share attributable to shareholders of the parent.

Contact details

Revenue by geography

2 Hill Street
St. Helier – JE2 4UA
Jersey, Channel Islands
+44 01534 513 100
www.coinshares.com

N/A

Contact details

2 Hill Street
St. Helier – JE2 4UA
Jersey, Channel Islands
+44 01534 513 100
www.coinshares.com

Revenue by geography

N/A

Management team

CEO: Jean-Marie Mognetti

Chief financial officer: Richard Nash

Jean-Marie is an experienced commodities trader with a background and expertise in quantitative analysis, risk management and alpha-generation through macro commodity-oriented trading programmes, including cryptocurrencies.

Richard is a chartered accountant with more than 10 years’ experience. He joined CoinShares in 2019 from Cairn Financial Advisors, where he acted as a nominated adviser to several listed companies, holding the status of a qualified executive (granted by the London Stock Exchange).

Chief strategy officer: Meltem Demirors

Chief revenue officer: Frank Spiteri

Meltem joined the management board in 2018, prior to which she was vice president of development at Digital Currency Group, one of the key players in the digital assets space and the owner of Grayscale Investments, the largest digital asset manager globally.

Frank joined CoinShares in 2020 and has over 10 years of experience as an ETP specialist. He was previously head of distribution and capital markets at WisdomTree. Prior to his career in the ETP industry, Frank was an equity and equity derivatives trader with KBC Financial Products for 11 years.

Group general counsel: Graeme Dickson

Head of marketing and communications: Benoît Pellevoizin

Graeme has 14 years’ experience as an English qualified solicitor and joined CoinShares in 2019 from Aviva, where he was senior legal counsel. He also held positions at Linklaters, White & Case, Bank of America and Standard Bank.

Benoît has 15 years’ experience in developing marketing, communications, advertising and branding. He joined CS from Ledger. Prior to that he held positions involving strategy, branding and innovation with Ogilvy Consulting, SID LEE, M&CSAATCHI, Fred & Farid and Digitas.

Head of trading technology: Pierre Porthaux

Pierre has close to 20 years’ experience in finance in both traditional markets and cryptocurrencies. Before joining CS, he co-founded Blockchain Solutions (a technology and strategy consulting company) and Emergence Labs (specialised in bitcoin trading technology), both located in Paris.

Management team

CEO: Jean-Marie Mognetti

Jean-Marie is an experienced commodities trader with a background and expertise in quantitative analysis, risk management and alpha-generation through macro commodity-oriented trading programmes, including cryptocurrencies.

Chief financial officer: Richard Nash

Richard is a chartered accountant with more than 10 years’ experience. He joined CoinShares in 2019 from Cairn Financial Advisors, where he acted as a nominated adviser to several listed companies, holding the status of a qualified executive (granted by the London Stock Exchange).

Chief strategy officer: Meltem Demirors

Meltem joined the management board in 2018, prior to which she was vice president of development at Digital Currency Group, one of the key players in the digital assets space and the owner of Grayscale Investments, the largest digital asset manager globally.

Chief revenue officer: Frank Spiteri

Frank joined CoinShares in 2020 and has over 10 years of experience as an ETP specialist. He was previously head of distribution and capital markets at WisdomTree. Prior to his career in the ETP industry, Frank was an equity and equity derivatives trader with KBC Financial Products for 11 years.

Group general counsel: Graeme Dickson

Graeme has 14 years’ experience as an English qualified solicitor and joined CoinShares in 2019 from Aviva, where he was senior legal counsel. He also held positions at Linklaters, White & Case, Bank of America and Standard Bank.

Head of marketing and communications: Benoît Pellevoizin

Benoît has 15 years’ experience in developing marketing, communications, advertising and branding. He joined CS from Ledger. Prior to that he held positions involving strategy, branding and innovation with Ogilvy Consulting, SID LEE, M&CSAATCHI, Fred & Farid and Digitas.

Principal shareholders

(%)

Daniel Masters

22.44

Mognetti Partners Limited

17.44

Russell Newton

12.20

Alan Howard

11.64

Adam Levinson

5.72

Paul Davidson

4.76

Meltem Demirors

4.08

Vitruvius Limited

3.77

Dwight Anderson

3.75

Horseferry Trading Pte Limited

2.50


General disclaimer and copyright

This report has been commissioned by CoinShares International and prepared and issued by Edison, in consideration of a fee payable by CoinShares International. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by CoinShares International and prepared and issued by Edison, in consideration of a fee payable by CoinShares International. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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