Earnings Call: Q2 2021

Aug 13, 2021

Good morning and welcome to this Q2 presentation for Arkane Crypto. My name is Torbjorn Bojenssen and I'm the CEO of Arkane crypto and it's a great pleasure to present the results from the previous quarter in Arkane. This has been the best quarter for Arkane in our throughout history. We have continued to deliver on our core strategy which is to develop and invest in projects focused on Bitcoin and digital assets. And our revenue saw strong growth and we exceeded €100,000,000 in revenue for the group for the first time. This was primarily due to our acquisition of Kaupant crypto and the revenue associated with their trading activity. We also saw strong growth in our gross margin on sales, more than doubling from the previous quarter up to $5,500,000 This was in addition driven by a strong quarter for both Arcane Assets and Arcane Research. Looking at the industry and the development during the previous quarter, the quarter was very volatile. Bitcoin actually reached a new all time high with a market capitalization of $1,200,000,000,000 This is still tiny compared to other major financial assets, but at the same time, it's large enough to actually become meaningful, to become substantial and something to take serious. Towards the end of the quarter, the Bitcoin price was in free fall and the price fell 50%. But the underlying adoption, the underlying momentum didn't tie. Retail will go in and out of this market based on the mood of Elon Musk and how he tweets. The leverage traders will be liquidated and kind of accelerate these type of fluctuations. But underneath this we've seen a strong trend going on for more than a year which is institutional adoptions. And institutions move slower and are more persistent than these kind of retail flows. And for that reason, We have also seen Bitcoin and the cryptocurrency space regaining substantial territory after the end of the quarter. And it's very interesting to see that the institutional interest is very much intact. Research done by Fidelity, one of the largest asset managers in the world, revealed that 71% of their clients Want to invest in digital assets like Bitcoin and half of them has already done so, so half of these 70 1%. So this means that, kind of the momentum is anything but over. And This institutional interest has of course affected the biggest banks in the world, the Tier 1 investment banks. They are starting to realize that if they want to stay relevant for the future, they have to start engaged with this part of the industry. Just a couple of years ago, they said that they would never touch Bitcoin, but now they're actually teaming up to start to figure out how they can trade. Our portfolio company Pure Digital, where we own 37.5%, is building an interbank market for these Tier 1 banks to trade Bitcoin and other digital assets. And during the quarter, PureCloud announced that Boney Mellon had joined State Street as one of a total of 6 banks that are a part of the consortium that has signed the lies with PUREs. So there are still 4 more banks that are part of Pure that are not yet disclosed but of the same caliber at Stay Street and Bonnimelon. During the quarter, Pure had its first kind of roundtable meeting bringing all of these banks together to discuss how they want to see the trading conducted. And we do expect to see the 1st test trades later this year. Moving over to another part of the industry, The previous quarter was a particularly strong one for the Lightning Network. So the Lightning Network is this scaling technology making it possible with instantaneous Bitcoin transactions without all of the electricity consumptions associated with the mining and kind of the block times waiting for confirmation associated with traditional Bitcoin transactions. The network actually grew exponentially during the period and this was accelerated with some strange news coming out of El Salvador, which caught many by surprise when they decided to introduce Bitcoin as legal tender and I use it for retail everyday payments. And the reason they can do that is because the apps they're using in Salvador is based on the Lightning Network. So this adoption is very positive for Bitcoin in general, but also companies like LM Markets in particular. So LM Markets is this derivatives platform using Bitcoin over Lightning so that users can deposit collateral instantaneously and trade straight from their own wallets. In RK in at the start of the quarter, we had a 6% or 7% ownership in LN Markets and we increased that to 16% through an investment of €1,500,000 In terms of trading volume on LN Markets, we saw a drop from the previous quarter where they reached SEK 800,000,000 in total trading volume, but this was primarily driven by the general drop in trading activity following the fall of the Bitcoin price towards the end of the quarter. More importantly, Alan Marcus continued to see strong growth in its user base and added 41% new users during the quarter and see strong growth now also after the quarter. Another major news during the quarter was kind of the movement or changes in policy from China. So actually ever since 2013, China has said that they would clamp down on the crypto industry and kind of ban it or make it difficult to interact with without doing too much. Now they actually kind of did what they said and almost overnight in June they kind of ban mining. China was the biggest country when it came to mining, the highest concentration of miners working out of China. So this had pretty big impact on the whole mining industry. Initially, many thought that this would be negative, but in retrospect this actually turned out to be a positive event. Mining is now much more decentralized as it spreads all over the world. It's also becoming greener as more renewables are being used. And the timing for China's ban on mining and our own move into mining in Arkane couldn't have been better because we announced our new business unit, Arkane Green Data, just days after the China ban was made public. And the first thing we did was to secure hosting capacity. So we have secured an initial hosting capacity of 2.5 megawatts. Half of that is becoming available to us right now and the other half at the start of next year. And following the China ban, what became abundant was miners, all these machines that needed a new place to be hosted. What we had secured was exactly that. Right now we are in the process of acquiring miners and kind of setting up. We moved into mining because we view it as a very lucrative business standalone. We are long term bullish on Bitcoin and being involved in mining is something that will generate substantial revenue for the company. But at the same time, it's also something that fits nicely together with the totality of our portfolio and we are working on refining the kind of the strategy for both scaling up and integrating this into some of our other services and we'll communicate that once that strategy is ready. And of course, as the name says, Arcane Green Data, We are not going to use any fossil fuels when we are mining. We are going to go for 100% renewable, clean hydropower and contribute to mining being kind of less negative for the environment. Then as I said, the quarter was very volatile. The crypto prices moved up a lot during the start and then crashed down towards the end of the quarter. And this crash towards the end of the quarter was of course then reflected in the AUM of our fund measured at the end of the quarter. But the Fund actually performed really well during this period of turmoil. Erik Wall and the rest of the team has managed to continue to outperform both Bitcoin and other cryptocurrency hedge funds as measured by the Eureka hedge fund cryptocurrency hedge fund index ever since its launch. So what the team has proven is the ability to deliver value to our investors systematically over time. And the main focus now is to really scale and grow the Fund. To that end, it's very interesting to see This trend of more and more investors wanting to have exposure to the cryptocurrency sector through ETPs, exchange traded products or ETFs, exchange traded funds. Arkane Crypto itself has actually been included in 2 such ETFs, meaning that when people are buying, for instance, shares in the Elvind Blockchain ETF. Elvind Blockchain ETF then buys shares in Arkane. For the Fund, We are working with Valor Structured Products, a specialist in creating such ETPs. They have launched several tracker ETPs tracking different cryptocurrencies such as Bitcoin. And what we're building now is a listed product that will track the performance of the fund. We expect to get this live during the autumn and once it's launched, what this means in practice is that you as an investor can go to your normal broker, be it Avanza, Nornet or whatever else and easily buy the ETP and get exposure to the performance. This is something that we believe will be very valuable to the fund, will help us grow the AUM and scale the fund going forward and will be a key part of our scaling strategy. Then over to Arkane Research, our market research arm, the team there continues to deliver top quality content. I think for the last year, there hasn't been a single day when Arkane Research hasn't had some headline in some news outlet, be it from traditional finance or more specifically crypto outlets. During the quarter, Arkane Research has continued to work with its business clients and form new partnerships. Notably, we are working closely with BlockFi and we're producing an institutional grade report that they distribute to their clients twice a month. We also worked with LMAX as the biggest institutional spot exchange in the crypto sector to develop an industry report describing the whole trading ecosystem. And we now see a lot of incoming calls from different companies, not only from the cryptocurrency sector anymore, also from traditional finance, from fund management and also from fintechs who want to kind of develop these type reports for 1 consultancy services. And this is very valuable to us in Arkane, both because it generates revenue and kind of helps Arkane Research grow as a business unit in its own right, but also as it kind of serves as a door opener and I'm a relation builder for the larger Arkane portfolio. In terms of our newsletter and kind of our weekly market report, we see strong growth in subscriptions there. And going forward, we are going to put more effort into scaling, do marketing around that and we expect to be able to accelerate that growth and have that as an additional revenue source going forward that becomes more substantial. Then to a part of the portfolio where we have seen some pretty big changes, our involvement in exchanges. So Q2 has been the Q1 where we fully controlled Kaupang crypto, this Norwegian cryptocurrency broker and also the quarter where we acquired outstanding shares in Trio, this Swedish cryptocurrency exchange. During the quarter, Kaipan Crypto launched a premium OTC service targeting larger clients doing larger trades from 500,000 Norwegian kroner or Swedish kroner for that matter and up to 50,000,000 or even more. Tapping into their access to deep liquidity, leveraging their key account managers and offering a personalized way to interact with the different clients. For Trio, right after the quarter, they could announce that they were partnering with Trustly and through that became the 1st cryptocurrency company in Europe to offer Trustly as a payment service. Anyone who's been working in the cryptocurrency industry knows that Payments is a pain point. There's been a lot of payment providers that have been reluctant and unwilling to serve cryptocurrency companies because they haven't known how to deal with the kind of risks and compliance uncertainty. And it's really great then to see a reputable company like Trustly choosing Trio as its first partner, reflecting how Trio is fully embracing being compliant and transparent I'm being able to make Trustly comfortable with the way they do KYC and AML. So this is the basis for kind of the 2 exchanges. We embrace regulation. We Try to be kind of best in class when it comes to being compliant and offer the best customer service. We have seen the trading volumes grow on both platforms, setting new records. But right now, it's not very efficient to have 1 tech stack running in Sweden, so operating one exchange there and another running for a broker here in Norway. So what we're working on is to build 1 unified infrastructure. So we're setting this up now in Google Cloud so that we'll have the tools to offer the best user experience possible and also the possibility to truly scale this so that they can be on the same footing, not only the same owner, but also on the same platform and through that, kind of tap into returns to scale and Realize Synergies. And when we're setting up this platform, while the focus now is on, serving the exchanges and kind of bringing that to the next level. We're setting it up in such a way where we can bring in largest parts of the Arkane portfolio. Because our mission or aim if you like is to become the leading full service digital finance platform in Europe. And we mean that not only by owning entities across the value chain, but also bringing them together. So the platform we're setting up now set up in such a way where we can also put in our payment service. So Tesla Coil will be integrated into this. Our asset management will be integrated into this. Our research arm will be integrated into this so we can have 1 unified product offering so that we can become the best place for users to learn, trade and invest in the blockchain ecosystem. So that is what we're going to focus on for the next quarter and kind of the next year for that matter. This is a kind of we are building in a way where we are getting progress in the shorter term, but this is also a long term journey. This is something we're really building to in a way where we can actually become the leader in Europe. But as this is a quarterly presentation, I guess it's in its nature is a little bit backwards looking and it makes sense to take a more thorough look at our financials. As I mentioned during the introduction, we had a record quarter reaching kind of the milestone over €100,000,000 in revenue for the first time and this was largely due to the acquisition of Kaipan Crypto and the accounting of their trading activity. Looking at our gross margin on sales, we more than doubled and reached a total of SEK 5,500,000. So right now, we're in a great position. During the quarter, we have also onboarded and secured new key hires. So we have the right team to scale and grow. We have a strong balance sheet. We ended the quarter with assets close to $100,000,000 $33,000,000 in our bank. And we are really now eager to continue building Arkane going forward. Looking at the results, it came in as expected with a loss of 1 point million. Compare that to the previous quarter with a loss of $11,000,000 It's not fully comparing apples and apples because a lot of the difference between the two quarters It's kind of the result of a technical accounting or accounting technicality linked to employees incentive scheme, so you get a better picture if you look the average. But still, the totality here is that we are in the position to continue to grow. We are a growth company, which means that Our aim is to grab market share. It is to expand. We take the revenue we make and we reinvest it in further growth I will continue to do that for the foreseeable future. So that was the presentation. And I guess now it will be good to open up for some Questions? Thank you. We'll just take a short break and then we'll go to questions. Thank you, Torbjorn. That was a great presentation. We've got a few questions coming in. The first concern is regulation. There's been lots of news around crypto regulation. How do you think this could impact Arkane? So a lot of the critics towards the crypto industry has pointed towards regulation and said that look, regulation is going to come and it's going to kill this industry. I don't view it that way at all. And I don't see that as what is happening. Rather the opposite. Regulation is coming in Cost of the industry has become large enough to actually matter. And what regulation does is that it derisks interaction with the industry for a lot of players. With regulation coming in, it becomes easier for banks like the big banks joining Pure to actually engage with this industry. Without regulation coming in, the industry cannot really grow. And I firmly believe that as long as the regulation is thoughtfully Formulated taking into account the particularities of crypto, it will be something that will help accelerate growth going forward. There is, of course, always the risk of overregulation, that regulation will be kind of shoehorned in a way that doesn't fit with crypto. But the beauty of this being a global industry then means that then quickly the industry will kind of allocate to those geographies where regulation works. And also most recently, we saw in the U. S. That the industry is able to mobilize and influence politicians so that regulations become more consistent with what makes sense in the industry. And also, as I said earlier in the presentation, in Arkane, we are really embracing this regulation. We are taking care of our CA AML responsibilities very seriously. And we think that this is kind of more clarity around regulation is something that will make it even easier for us to grow going forward. Thank you. You mentioned mining. Can you speak a little bit about the environmental impact of mining in general? Yes, so a lot of people have looked at the total energy consumption or electricity consumption going into mining and compare that to kind of medium sized countries like Switzerland or something. And then from that, they've concluded that it must be an environmental disaster. They also seem that in the past, a lot of mining happened in China where they assumed a very high degree of coal being used, making the problem even worse. The reality though is that the total energy consumption going into mining is actually pretty low compared to any other industry, even just the normal data industry. So it's not really, really a big concern in its own right amount of energy. Also that energy is naturally being extracted where it is the cheapest, where the opportunity cost is the lowest. And when it comes to the environmental impact, that is not linked to the energy consumption, but rather to the mix of energy sources being used. And what we're clearly seeing now with China having shut down mining and miners flooding primarily to the West It's a massive uptick or at least a pretty strong increase in the use of renewables. The best estimates right now It sits around 56% renewable share for mining. And of course, you have companies like Arkane going for 100%. So it's not a big concern because the total energy usage isn't that high. The energy mix is becoming greener. And lastly, there has been a very common misunderstanding, which is that a lot of people has looked at the energy consumption for the average number of transactions and assume that if Bitcoin becomes a payment instrument like when El Salvador now is rolling it out as legal tender that the energy consumption would increase in line with an increase in the number of transaction. That is, however, wrong. The energy consumption is what secures the blockchain and is to be treated as a fixed cost, something that doesn't scale with number and transactions. You can double the number of transactions on the Bitcoin blockchain without having extra energy consumption and especially so with the Lightning Network, where you can have millions of transactions per second outside of the blockchain without triggering any increase in energy consumption. So Bitfine can easily scale to serve the whole world as a payment rail, if that's where we're ending up, without energy consumption having to increase in line with that. Thank you. I think we have time for one last question. What's your view on where Bitcoin is today and where it's going? So as I said, the previous quarter was very volatile, and we saw this massive drop of more than 50% towards the end of the quarter. But unlike the bear market of 2018, where the fall Completely killed the momentum and we had a long crypto winter. The momentum is still very much intact. Institutional investors continue to come in. Companies like RK in continue to build out infrastructure. The market has regained strength, and I think the underlying adoption and the rate has never been higher. So I'm extremely bullish on Bitcoin going forward. I don't know where the price will be tomorrow, but I do know that it will be volatile because we are still early. But on a longer time frame, Bitcoin looks stronger than ever. And in Arkane we are kind of more ready than ever to build out infrastructure and giving users and the company's easy access to interact with this ecosystem. Thank you very much. Good. Thank you, everyone, for watching. Please read our quality report online. Check out our services and reach out if you have any questions. Have a great day.