Arcane Crypto — Crypto trading volumes picked up in Q421

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 — Crypto trading volumes picked up in Q421

In Q421 Arcane Crypto reduced its EBITDA loss to SEK3.4m from SEK10.4m in Q420, on the back of higher trading volumes and the gross margin of its crypto broker Kaupang Krypto, as well as the launch of bitcoin (BTC) mining in October 2021. The latter is now fully ramped up after deployment of the second batch of miners in Q122. These operations generated a robust average gross margin of 65% in Q421. However, the subsequent BTC price decline from its all-time high in November 2021, coupled with high electricity prices in Norway, means Arcane Crypto now expects to be close to cash flow neutral in the near term (compared to previous expectations of being cash flow positive from Q122 onwards).

Milosz Papst

Written by

Milosz Papst

Director, Financials

TMT

Arcane Crypto

Crypto trading volumes picked up in Q421

TMT

Spotlight - Update

16 March 2022

Price

SEK0.09

Market cap

SEK798m

Share price graph

Share details

Code

ARCANE

Listing

Nasdaq First North

Shares in issue

8.51bn

Last reported gross cash at end-2021

SEK19.3m

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 assets theme.

Several holdings approaching commercialisation stage.

Continued high crypto trading volumes would likely benefit several of the company’s holdings.

Bear

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

Dependent on continued digital asset adoption.

Risk of a crypto bear market after 2021 hype, which could result in muted trading volumes.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Arcane Crypto is a research client of Edison Investment Research Limited

In Q421 Arcane Crypto reduced its EBITDA loss to SEK3.4m from SEK10.4m in Q420, on the back of higher trading volumes and the gross margin of its crypto broker Kaupang Krypto, as well as the launch of bitcoin (BTC) mining in October 2021. The latter is now fully ramped up after deployment of the second batch of miners in Q122. These operations generated a robust average gross margin of 65% in Q421. However, the subsequent BTC price decline from its all-time high in November 2021, coupled with high electricity prices in Norway, means Arcane Crypto now expects to be close to cash flow neutral in the near term (compared to previous expectations of being cash flow positive from Q122 onwards).

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)

(0.031)

N/A

N/A

N/A

12/21

332.2

(22.0)

(163.4)*

(0.019)

N/A

N/A

N/A

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

Kaupang Krypto’s revenue up 85% versus Q321

According to Arcane Crypto, BTC trading volumes increased c 22% in Q421 versus Q321, with several of its portfolio companies seeing an even stronger pick-up in gross turnover (Kaupang Krypto +85%, Trijo +78%, LN Markets +104%), albeit from a relatively low base given the early stage of their development. Meanwhile, Puremarkets expects trading on its interbank wholesale marketplace to commence in H222, while the exchange traded product (ETP) based on Arcane Assets’ cryptocurrency fund should be launched in Q222, according to management.

Risk of ‘crypto winter’ higher, but adoption continues

While digital asset prices retraced visibly from their peak in November 2021, we are still not assuming a crypto bear market similar to the one in 2008 in our base scenario for 2022 given the continued progress in digital assets adoption and a return to net inflows to related investment products after a temporary period of net outflows in late-December 2021/early January 2022 (based on CoinShares International data). Arcane Crypto remains committed to supporting continued digital asset adoption by further development of its unified platform, an API-driven approach, and building trust and distribution through its market-leading research.

Valuation: LTM share price decline of c 73%

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

Q421 gross profit driven by brokerage and mining

Arcane Crypto reported a Q421 net loss of SEK12.6m, somewhat higher than the SEK9.5m loss in Q420. However, it was able to reduce its EBITDA loss to SEK3.4m (versus SEK10.4m in Q420). Its Q421 revenue stood at SEK148.7m versus SEK1.1m in Q420, predominantly reflecting the gross turnover of Kaupang Krypto (SEK138.9m) acquired in March 2021, with the balance attributable to BTC mining operations (Arcane Green Data), the fund management services to Arcane’s cryptocurrency fund (Arcane Assets), retail exchange Trijo and Arcane Research.

Arcane Crypto had cash and bank balances of SEK19.3m at end-2021, broadly in line with SEK17.9m at end-2020. During the year, its negative operating cash flow of SEK37.1m and net cash outflow for investments of SEK88.3m (primarily covering the acquisition of stakes in Kaupang Krypto, Trijo and LN Markets, as well as crypto mining equipment) was mainly financed through two private placements totalling SEK110.9m and some minor borrowings of SEK17.5m.

Exhibit 1: Q421 and FY21 results highlights

SEK000s

Q421

Q420*

FY21

FY20*

Revenue

148,684

1,062

332,239

1,941

Other operating income

246

162

386

162

Total revenue

148,930

1,224

332,625

2,103

Cost of goods sold

(136,280)

0

(304,837)

0

Personnel costs

(7,617)

(2,949)

(24,063)

(8,992)

Other external expenses

(8,416)

(8,633)

(25,694)

(10,923)

EBITDA

(3,383)

(10,358)

(21,969)

(17,812)

D&A, including write-downs on intangibles

(8,354)

(15)

(11,499)

(66)

EBIT

(11,737)

(10,373)

(33,468)

(17,878)

Profit from participation in associated companies

(1,540)

(411)

(5,490)

37

Interest income and other financial income

1,837

1,173

4,122

1,193

Interest expenses and other financial costs

(1,128)

78

(128,604)

(228

Profit before tax

(12,568)

(9,533)

(163,440)

(16,876)

Income taxes

0

0

0

0

Net income

(12,568)

(9,533)

(163,440)

(16,876)

Adjusted net income**

(12,568)

(9,533)

(36,487)

(16,876)

EPS (diluted, SEK)

(0.001)

(0.018)

(0.019)

(0.031)

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

Kaupang improving trading volumes and gross margin

According to our calculations, Arcane Crypto’s gross profit was SEK12.7m in Q421, of which c SEK5.5m was attributable to Kaupang Krypto. This implies a solid gross margin of 4.0% (versus 2.0% in Q321 and 2.5% in Q221), which we understand was driven by: 1) the acquisition of new FX partners; 2) negotiation of better terms with liquidity providers; and 3) additional income from market making. Kaupang saw a significant 85% y-o-y increase in gross turnover in Q421 versus a 22% y-o-y BTC volume increase across the broader crypto markets, according to Arcane Crypto. The broker also experienced a gradual increase in both average order size and customer base on a month-on-month basis throughout Q421.

BTC mining operations now fully ramped up

Arcane Green Data generated Q421 revenue of SEK8.3m at a 65% gross margin, implying a gross profit of c SEK5.4m. Arcane Crypto’s BTC mining operations were launched in October 2021 based on the first batch of 352 application-specific integrated circuits (ASICs) representing a hashrate of c 39 petahash per second (PH/s), with the second batch (with a hashrate of 36 Ph/s) delivered as planned in Q122. We estimate that at the current BTC price of c US$39,000 and hashrate of c 200 exahash per second (EH/s), Arcane Green Data should generate annual revenue of c US$5.0m (or c SEK48m). Based on our conversation with management, we understand that the company is currently selling all mined BTC immediately after receiving block rewards. However, amid the recent decline in the BTC price from its all-time high in November 2021, the Arcane Crypto group now expects net cash flow to be close to neutral (ie slightly negative or slightly positive) in the near term, compared to previous expectations of becoming cash flow positive from Q122 onwards.

We note that while Arcane Green Data generates a robust gross margin in absolute terms, it is negatively affected by high spot electricity prices in Norway. Management highlighted that at an electricity price of SEK1.0 per kilowatt-hour (kWh) and current market conditions, its cost of mining stands at SEK167k (ie c US$16.7k) per BTC. This suggests that it is positioned relatively high on the cost curve versus other listed BTC miners. We estimate that at the above-mentioned electricity price, the business’s gross margin is currently c 54%.

ETP based on Arcane Assets’ fund to be launched in Q222

Management highlighted that Arcane Assets is close to finalising the structure of an ETP based on its cryptocurrency fund with Valour Structured Products, with the latter receiving approval from the Swedish regulator on its base prospectus (which includes the above-mentioned ETP). Consequently, Arcane Crypto expects the launch of the ETP in Q222, providing an important distribution channel for the hedge fund. While the European ETP market is currently dominated by single-asset ETPs, mostly those based on BTC and Ethereum (ETH), with multi-asset ETPs representing c 4% of total AUM (according to our estimates), we expect the latter to grow their market share in the coming years as investors realise the need to include a broader range of digital assets in their portfolios. Based on existing multi-asset ETPs, we expect the ETP launched by Valour and Arcane Assets may initially attract funds in the single- to mid-double-digit million-euro range (although probably closer to the lower end of this range at launch).

Trijo introducing trading fees

The retail crypto exchange Trijo saw a 78% sequential increase in trading volumes in Q421 which, according to Arcane Crypto’s management, was stimulated by: 1) a revised fee structure; 2) integration with the payment service provider Trustly; and 3) the launch of Trijo Autopilot for regular, automatic saving in BTC, ETH and Litecoin. While the company initially considered moving to a brokerage model based on spreads (similar to Kaupang Krypto), it recently introduced a trading fee schedule starting at 0.5% (previously, it did not charge trading fees to stimulate userbase growth). Consequently, it generated revenue of SEK741k in Q421 versus SEK525k in Q321. Nevertheless, Arcane Crypto continues to work on a unified operational and infrastructure framework for Kaupang and Trijo, and also working with Kaupang on improving its liquidity.

Trading on the Pure Digital platform expected to start in H222

With respect to holdings accounted for at equity (which in aggregate generated a loss of SEK1.5m in Q421 versus a loss of SEK0.4m in Q420), Puremarkets continues regular talks with its consortium of tier one investment banks related to the company’s interbank wholesale marketplace Pure Digital, with trading expected to commence in H222. On 1 March 2022, Puremarkets announced a partnership with Cobalt covering FX and digital asset risk and settlement infrastructure. LN Markets (a derivatives trading platform leveraging the Bitcoin Lightning Network) had trading volumes of US$120m in Q421 versus US$53m in Q321 and experienced a continued increase in its userbase (up 33% q-o-q). We note that Arcane Crypto decided to sell its 45% stake in the market maker and liquidity provider Alphaplate in January 2022 (the business generated an estimated Q421 profit of c £105.1k).

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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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New Zealand

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United Kingdom

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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.

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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

95 Pitt Street, Sydney

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

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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