Arcane Crypto — Building a trusted gateway to digital assets

Arcane Crypto (Stockholm: ARCANE)

Currency in SEK

Last close As at 26/01/2023

SEK0.04

0.00 (−7.50%)

Market capitalisation

SEK360m

Research: TMT

Arcane Crypto — Building a trusted gateway to digital assets

Arcane Crypto continues to build its unified platform as a single access point to several proprietary digital asset solutions. It targets family offices and high net-worth individuals (HNWIs), two groups that it believes are underserved by traditional private banks and wealth managers in terms of access to the crypto ecosystem. Meanwhile, its Q122 results were affected by the muted activity in the digital asset markets (Kaupang, LN Markets), and high electricity prices in Southern Norway (Arcane Green Data).

Milosz Papst

Written by

Milosz Papst

Director, Financials

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TMT

Arcane Crypto

Building a trusted gateway to digital assets

TMT

Spotlight - Update

13 June 2022

Price

SEK0.049

Market cap

SEK417m

Share price graph

Share details

Code

ARCANE

Listing

Nasdaq First North

Shares in issue, excluding 58.5m shares to be issued in Q222 to settle the Kaupang Krypto earn-out

8.51bn

Last reported gross cash at end-Q122

SEK25.5m

Business description

Arcane Crypto develops the infrastructure and products to enable worldwide adoption of bitcoin and digital assets. It is building a platform for users to learn, trade and invest in digital assets from one account. Arcane aims to achieve scale by providing a platform with open APIs, allowing third parties to develop their own products using its technology then distribute them to Arcane’s users.

Bull

Diversified exposure to the emerging digital asset theme.

Several solutions approaching commercialisation stage.

Crypto adoption continues despite bear market.

Bear

Early-stage, loss-making businesses are inherently risky.

Dependent on continued digital asset adoption.

A continuation of the crypto bear market may lead to muted trading volumes.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Arcane Crypto is a research client of Edison Investment Research Limited

Arcane Crypto continues to build its unified platform as a single access point to several proprietary digital asset solutions. It targets family offices and high net-worth individuals (HNWIs), two groups that it believes are underserved by traditional private banks and wealth managers in terms of access to the crypto ecosystem. Meanwhile, its Q122 results were affected by the muted activity in the digital asset markets (Kaupang, LN Markets), and high electricity prices in Southern Norway (Arcane Green Data).

Historical financials

Year
end

Revenue
(SEKm)

EBITDA
(SEKm)

PBT
(SEKm)

EPS
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/18

0.0

(1.9)

(3.0)

N/A

N/A

N/A

N/A

12/19

0.0

(7.8)

(7.3)

N/A

N/A

N/A

N/A

12/20

1.9

(17.8)

(16.9)

(0.03)

N/A

N/A

N/A

12/21

332.2

(22.0)

(163.4)*

(0.02)

N/A

N/A

N/A

Source: Company data. Note: *Includes SEK126.9m one-time accounting effect arising from the reverse takeover.

Crypto bear market, yes; derailed adoption, no

The crypto markets have seen a significant downturn from the November 2021 peak, with bitcoin (BTC) and Ethereum prices down by c 65% and 75%, respectively. Historically, major bull runs occurred after every Bitcoin halving (in 2012, 2016 and 2020) and lasted for 1–1.5 years. The start of the current crypto bear market (c 1.5 years from the May 2020 halving) is in line with this pattern. However, we have not seen enough indication that global digital asset adoption has been derailed (eg, heavy crypto exchange traded product, Exchange Traded Product (ETP)/blockchain exchange traded fund (ETF) outflows, suspension of new product launches). Nevertheless, we will closely monitor the developments throughout the rest of 2022 for signs of a halt in crypto adoption.

Q122 results affected by muted crypto activity

Arcane Crypto reported a net loss of SEK10.2m in Q122 compared to a loss of SEK9.1m in Q121 and SEK12.6m in Q421. While Kaupang Krypto and LN Markets were affected by the decline in trading volumes in digital asset markets during the quarter, Arcane Crypto was able to slightly reduce its EBITDA loss to SEK2.1m from SEK.3.4m in Q421 on the back of operating cost cuts. With cash and equivalents of SEK25.5m at end-March 2022, it seems to have a cash runway of a few quarters, which may be augmented by resumed BTC mining in the new location (see page 3).

Valuation: Last 12 month share price decline of c 70%

In line with previous research, we refrain from valuing Arcane Crypto due to its early development stage. However, as a broad reference point, we note the subscription price in the directed issue completed in August 2021 was SEK0.203 per unit (one share plus one warrant).

Seeking to address the needs of family offices/HNWIs

After acquiring businesses with key capabilities in the digital asset space (largely completed by mid-2021), Arcane Crypto now focuses on developing a fully regulated, cloud-based wealth management platform that will provide access to products offered by several of its entities under one roof. This includes research, brokerage and investment services (the ‘learn, trade, invest’ concept, see Exhibit 1). In this way, Arcane Crypto aims to fulfil its mission of enabling the adoption of digital assets worldwide.

The company intends to tailor its infrastructure to the needs of family offices and HNWIs to become their trusted single point of access to the digital asset universe. Management highlighted that these two groups drive most of Arcane Crypto’s activity and believes they are underserved with respect to digital asset services by their private banks and wealth managers. This is because the latter do not have the necessary knowhow and infrastructure and are concerned about regulatory uncertainty related to digital assets (and the associated reputational risk of being involved directly in the crypto business). Importantly, management believes crypto exchanges are not well suited to serve most family offices and HNWIs, given they primarily offer retail-focused, DIY-style services, without readily available trading strategies, reporting frameworks and access management systems. Arcane Crypto’s solution is being designed to operate on top of these exchanges and be offered as a software-as-a-service platform for private banks and wealth managers, which will enable them to offer digital asset services to their customers (including family offices and HNWIs).

Arcane Crypto launched its research content as the first module on the platform (given its role as a brand builder and ‘door opener’) and highlighted that it plans to introduce the investment application during Q222 and the new trading experience later this year.

Exhibit 1: Range of services to be offered on Arcane Crypto’s platform

Source: Company data

Q122 results: Affected by muted market activity

Arcane Crypto reported a net loss of SEK10.2m in Q122, slightly above the adjusted net loss of SEK9.1m in Q121, but lower than the SEK12.6m loss in Q421 (see Exhibit 2). At end-March 2022, Arcane Crypto had cash and equivalents of SEK25.5m, leaving a cash runway of a few quarters. We note the Q122 cash flow was positive at SEK6.2m. This was supported by three things: SEK1.6m operating cash flow, with a SEK14.3m positive impact from the change in operating receivables and liabilities; positive cash flow from investing activities of SEK3.5m, which was a function of SEK4.5m proceeds from the disposal of Arcane Crypto’s 45% stake in Alphaplate in January 2022 and a c SEK1.0m investment in mining hardware; and a minor share issue of SEK2.4m. Arcane Crypto’s cash flow in the coming quarters should be supported by its relocated BTC mining operations (see below), although this will be dependent on the prospective development of the BTC price.

Q122 revenue reached SEK105.6m versus SEK2.1m in Q121 (before the consolidation of the broker Kaupang Krypto) and SEK148.7m in Q421. This largely represents the gross turnover of Kaupang Krypto at SEK92.2m, down 34% from SEK138.9m in Q421 amid more muted volumes across the broader crypto markets (management disclosed that BTC trading volumes were down 30%). Around SEK9.4m of the Q122 revenue was attributable to Arcane Green Data, that is, Arcane Crypto’s BTC mining operations. Management highlighted that these operations achieved an average gross margin of c 60% in Q122 (vs 65% in Q421), with profitability being increasingly affected by higher electricity prices in Southern Norway. To mitigate this, the company is moving its BTC mining operations to Northern Norway based on a hosting agreement with Exanorth (a subsidiary of Bitzero Blockchain). Management expects the move will be completed by the end of this month and that its operations will generate 24 BTC per quarter at a gross margin in excess of 70%, based on the market conditions at the time of the announcement (13 June 2022).

The 60% average gross margin reported by Arcane Green Data implies a gross profit of c SEK5.7m (vs SEK5.4m in Q421), based on which we estimate that Kaupang reported a gross profit of SEK1.2m in Q122 (vs SEK5.5m in Q421) and an average spread of 130bp (vs 400bp in Q421 and 200–250bp in Q221 and Q321). In terms of new initiatives, Kaupang carried out a non-fungible token (NFT) offering in collaboration with the contemporary artist Bjarne Melgaard and expanded its custody support for clients to include NFTs. Moreover, it expanded the range of supported tokens and networks.

Arcane Research posted revenue of SEK1.1m vs SEK0.2m in Q121 and SEK0.9m in Q421, with its subscription base growing 162% y-o-y in Q122. Arcane Assets reported revenue of SEK0.8m (vs SEK1.8m in Q121 and SEK3.3m in Q421) and attracted US$1.4m of inflows in Q122, bringing its total assets under management to US$16.1m (vs US$15.7m at end-2021). Management flagged that the listing process for the ETP based on Arcane Assets’ hedge fund (which we discussed in our previous note) has been delayed due to a slow approval process from exchanges.

The weaker market activity has also accompanied a 40% q-o-q decline to US$71m in the trading volume of LN Markets (in which Arcane Crypto holds a 16% stake), a derivatives trading platform powered by the Bitcoin Lightning Network. That said, trading volumes were still ahead of Q221/Q321 and the company’s userbase continued to grow, up 18% q-o-q. Post reporting date, the platform launched options trading. Together with Puremarkets (where Arcane Crypto has a 37.5% stake), which is yet to launch its Pure Digital wholesale marketplace for top-tier investment banks, these two entities combined (consolidated at equity) posted a SEK0.5m loss in Q122. Arcane Crypto’s retail exchange Trijo enjoyed an increase in trading volumes and customer base by 27% and 15%, respectively (a continuation from the 78% q-o-q increase in Q421), although from a relatively low base (with Q122 gross turnover of below SEK100m).

Exhibit 2: Q122 results highlights

SEK000s

Q122

Q421

Q321

Q221

Q121

Revenue

105,563

148,684

81,165

100,296

2,094

Other operating income

302

246

1

76

63

Total revenue

105,865

148,930

81,166

100,372

2,157

Cost of goods sold

(94,764)

(136,280)

(73,722)

(94,835)

0

Personnel costs

(6,543)

(7,617)

(7,730)

130

(8,846)

Other external expenses

(6,683)

(8,416)

(5,773)

(7,151)

(4,354)

EBITDA

(2,124)

(3,383)

(6,059)

(1,484)

(11,043)

D&A, including write-downs on intangibles

(6,710)

(8,354)

(2,046)

(1,063)

(36)

EBIT

(8,834)

(11,737)

(8,105)

(2,547)

(11,079)

Profit from participation in associated companies

(499)

(1,540)

(1,259)

(3,138)

447

Interest income and other financial income

129

1,837

2,260

(1,581)

1,606

Interest expenses and other financial costs

(973)

(1,128)

(662)

210

(127,024)

Profit before tax

(10,178)

(12,568)

(7,766)

(7,056)

(136,050)

Income taxes

0

0

0

0

0

Net income

(10,178)

(12,568)

(7,766)

(7,056)

(136,050)

Adjusted net income**

(10,178)

(12,568)

(7,766)

(7,056)

(9,097)

EPS (diluted, SEK)

(0.001)

(0.001)

(0.001)

(0.001)

(0.016)

Source: Company data. Note: *Arcane Crypto results. **Adjusted for SEK126.9m one-time accounting effect arising from the reverse takeover.

General disclaimer and copyright

This report has been commissioned by Arcane Crypto and prepared and issued by Edison, in consideration of a fee payable by Arcane Crypto. 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.

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Copyright: Copyright 2022 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

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Arcane Crypto and prepared and issued by Edison, in consideration of a fee payable by Arcane Crypto. 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 2022 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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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