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Currency in SEK
Last close As at 28/03/2023
SEK0.04
▲ 0.01 (21.88%)
Market capitalisation
SEK284m
Research: TMT
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).
Arcane Crypto |
Building a trusted gateway to digital assets
TMT |
Spotlight - Update
13 June 2022 |
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Arcane Crypto is a research client of Edison Investment Research Limited |
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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).
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Historical financials
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.
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Exhibit 1: Range of services to be offered on Arcane Crypto’s platform |
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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.
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Research: TMT
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