Thank you for standing by, and welcome to the CoinShares Q2 earnings broadcast. All participants dialing in are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. You can submit your questions via the post box below the video on the platform. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your host, Jeri-Lea Brown. Thank you.
Thank you, operator. I would like to welcome you all to CoinShares' 2024 Q2 earnings call and webcast. Speaking from management today will be Jean-Marie Mognetti, Chief Executive Officer, and Richard Nash, Chief Financial Officer. All those joining today are encouraged to log in to the live event, where you'll be able to view the accompanying presentation during today's call. Alternatively, the results and a copy of the presentation are available to download from the Investor Relations section of the CoinShares website. A replay of the webcast will be available for 30 days following the live call, and a transcript will be posted on the company's website as soon as it is available. Following the presentation, we will host a short Q&A via the webcast platform. Should you wish to submit a question to the management team, please provide your name and company affiliation.
We will do our best to get to as many as we can within the allotted time. Lastly, our safe harbor statement. CoinShares would like to remind everyone that, except for historical information contained herein, statements made on today's call and webcast that would constitute forward-looking statements are based on currently available information. The company assumes no responsibility to update such forward-looking statements, and I would like to point you to the risk factors associated with our business, which are detailed in our prospectus. At this time, I will turn the call over to Jean-Marie.
Good afternoon, everyone. Thank you for joining us today to discuss CoinShares' performance during Q2 2024. As it is our custom for now 13 consecutive quarters, I will begin with an overview of the digital asset market landscape before delving into our business performance, so let's start. The digital asset industry has continued to demonstrate remarkable resilience and evolution this quarter. We observed strong investor interest in spot Bitcoin ETPs, with Q2 inflows for our industry reaching $2.75 billion. As of early July, cumulative total net inflows year to date had reached $16.84 billion. It is interesting to note that this number is tracking fairly well the projection made by the company when we launched CoinShares Physical back in January 2021 in Europe.
We have also seen significant, yet this time, unexpected momentum towards the approval of spot Ethereum ETPs in the United States. This has been driven by the SEC shifting stance on this topic. We are not U.S. agency experts, but there is no other explanation but a political request for such a dramatic acceleration. This could potentially, and in due time, open doors for a wider range of other crypto-based investment vehicles. In short, a very positive development for our industry and CoinShares. Interestingly, Bitcoin show again its hyper-macroasset characteristic recently, with the price dropping sharply during the Iranian weekend attack before surging on the back of prediction of a Trump election victory following a failed assassination attempt. This trend is linked to Trump's perceived crypto-friendliness and proposed economic policies. Since then, the Democrats are now also courting the crypto audience.
Again, we are not U.S. politics expert, but common sense indicate that crypto should be a bipartisan topic and not the monopoly of one camp. It is important for industry to remain balanced and of both parties. On the global regulatory front, we have witnessed notable progress across the various jurisdictions. As an example, Hong Kong made a significant move by approving its first spot, Bitcoin and Ethereum ETF, making a crucial step in integrating cryptocurrencies into the Asian financial landscape and certainly one day into mainland China. In Europe, we have seen advancement in the implementation of MiCA rules, but also defining the regulatory framework for digital asset in the region, especially around the question of stable coins, something I will briefly touch upon later in the discussion.
In what used to be Europe, the London Stock Exchange has taken a step forward by listing Ethereum and Bitcoin ETPs, providing institutional investors, and only these ones, with regulated access to these digital assets. This move to date has not been a successful one, but it's not surprising given the regulatory constraint imposed by the country since 2019. Meanwhile, in the U.S., the House passed the FIT Act, which aimed to provide much-needed clarity on crypto market regulation. These progresses across different regions are expected to bolster investor confidence and market stability. These developments continue to validate CoinShares' initial investment thesis about the institutionalization of digital assets. To conclude this broad market update, I'd like to highlight a significant achievement for CoinShares this quarter. We successfully completed the sale of our FTX claim, which yielded a positive result for the company and its shareholders.
Our patient and strategic approach paid off, resulting in a recovery rate of 116% net of broker fees. In concrete terms, we wrote off from our balance sheet GBP 26.6 million in November 2021 and generated an exceptional revenue of GBP 31.32 million in June 2024. This outcome is allowing us to, at last, turn the page of the FTX saga and focus on the future. Now, before we go any further in business updates, let's turn to our financial results. For this, I'll hand over to Richard Nash, our CFO. Richard, over to you.
Thanks, Jean-Marie. The group started 2024 with extremely strong performance in all areas of the business, with Q1 posting the highest quarterly EBITDA in the group's history. The performance of the underlying business in Q2 has actually been largely comparable to that of Q1. That being said, during Q2, and specifically in June, saw the occurrence of two key events, which have both had a material impact on overall group performance, one being positive and one negative. On the positive side, we have the sale of the group's FTX claim, while on the other hand, we elected to impair in full our holding in FlowBank. Our combined revenue gains and other income for Q2, inclusive of the FlowBank impairment, stands at GBP 8.9 million, but excluding this amount, the top-line performance for the quarter stands at GBP 30.6 million.
Having said that, despite the impact of the impairment, the year-to-date top-line performance of GBP 52.8 million still sits comfortably ahead of the comparable period of 2023, which is at GBP 32.5 million. Even so, at the Adjusted EBITDA level, the impact of this impairment is more than offset by the FTX claim sale, which is classed as an exceptional item to align with the treatment when these assets were initially written off during 2022. So Adjusted EBITDA for the quarter stands at GBP 26.6 million, which remains solid and at stronger margins than last year, due to our ongoing focus on ensuring cost control amidst a backdrop of market swings. On the cost side of things, we've seen some increases when compared to 2023, due to a variety of factors.
On the direct cost side, the increases are primarily driven by increased custody fees due to larger AUM held across the group, while on the admin expenses side, we've seen increases primarily due to larger bonus accruals driven by stronger performance and increased costs following the acquisition of Valkyrie that completed during Q1. Total comprehensive income for the quarter of GBP 25.8 million has brought our year-to-date bottom line performance to GBP 59.9 million, a number which is already well in excess of the entirety of 2023, which landed at GBP 38.4 million. It's also noted that this quarter, our adjusted EBITDA is largely comparable to our overall total comprehensive income due to limited impact on our below-the-line items.
The currency translation differences that arise on consolidation, which historically have had quite a large impact at times, have been very limited thus far in 2024, due to the fact that USD-GBP rates at the end of H1 are comparable to those at the opening of the year. So now looking a little bit more closely at the main business units of the group, and starting with the asset management platform. And just as a reminder, the components of this business unit are the CoinShares XBT Provider ETPs, our CoinShares Physical ETPs, the CoinShares Blockchain Global Equity Index, or Block Index, and from the end of Q1, also now the four ETFs within the Valkyrie product suite. So the story within asset management is very consistent with that of the previous quarter. Strong top-line performance, continued diversification of management fees, coupled with cost control and very solid margins.
As can be seen from the table here, the overall gross profit margin of the group's asset management platform remains very healthy and very stable. Total management fees for the quarter of GBP 22.4 million are the group's second highest on record behind Q4 2021. This was a statement we also made last month, and we hope to be able to surpass our best quarter by the end of the year as a result of price action, supported by inflow and continued diversification of our products. It's also noted that we've more or less equaled our entire 2023 performance within asset management just in the first six months of 2024. CoinShares XBT Provider fees for the quarter amount to GBP 17.7 million, and this performance has been achieved against a backdrop of net outflow of approximately $131 million over the quarter.
Also, the price declines that we saw at the end of Q1 have brought the overall AUM within CoinShares XBT Provider from around $3.7 billion to around $3.15 billion. CoinShares Physical has posted again, one of its strongest quarters on record, with management fees, inclusive of the revenue generated from staking fees, of GBP 3.7 million. A core driver for this performance, as we mentioned last quarter, is the introduction of staking capabilities on the CS Physical Ethereum product, which has brought a material benefit to both CoinShares and note holders alike. And this performance has, of course, also been aided by ongoing inflow into the product suite. Inflow during the quarter amounted to $66 million.
Despite the positive flow performance seen during the quarter, the price movement saw AUM within the CoinShares Physical product suite decrease by around 12% from $1.66 billion to the closing AUM for the quarter of $1.46 billion. This is predominantly driven by the, you know, the price declines we saw at the end of the quarter. Valkyrie fees of GBP 435,000 represent the group's first full quarter of management fees from the Valkyrie product suite that joined the group at the end of Q1, and the closing AUM across the four ETFs within the Valkyrie product suite stands at $317 million as at the end of June.
As we always like to remind everyone, the flows for our ETP product suites and those of our key competitors is published in our weekly digital funds flow report, which is available on our website, along with our usual daily proof of reserve solution for our main products. Now on to capital markets. The top-line performance of the group's capital markets business unit in Q2 continues to demonstrate the benefit that diversification of activities can bring, resulting in total other income and gains for the quarter of GBP 11.2 million, which is nicely up on last year's Q2 performance of GBP 8.5 million. This brings our year-to-date top-line performance for the business unit to GBP 28.5 million, which is over double what we saw for the same period in 2023.
The overall performance at an operating profit level for the business unit for Q2 is notably higher than recent quarters at GBP 37.7 million, but this is due to the exceptional item recognized in the period following the successful sale of the group's FTX claim. The agreement we entered into, which allowed us to ultimately sell the claim, yielded a recovery rate of 116% net of broker fees, resulting in a total return of GBP 28.8 million. So looking a little bit closer at the different activities within capital markets, liquidity provisioning started the year very strong due to the high levels of flow experienced on CoinShares XBT Provider.
This has decreased somewhat moving into Q2, with total gains of GBP 0.9 million, albeit this is still well ahead of the prior year, which was at GBP 0.2 million for the same period. Looking at delta-neutral trading strategies, so we stated in the Q1 report that we expected these to improve moving into Q2, following the deployment of a variety of new strategies towards the end of Q1. This has indeed been the case, with performance for Q2 of GBP 5.6 million, bringing a year-to-date performance up to GBP 6.2 million. Fixed income activities continue to show consistent performance, with income of GBP 2.1 million for Q2.
This consistency arises from the fact that our digital asset lending capacity is largely driven by our robust risk framework, and the fact we continue to only interact with a very small number of high-quality counterparties in order to minimize the risk of credit losses at all times. The main driver for the business unit, however, remains consistent with that of previous quarters, is our staking income. The total value of staking yield generated over Q2 amounts to approximately GBP 6.1 million, and this remains driven by ETH prices, yield, and our capacity to deploy, which we are constantly reviewing.
Just in closing, before I hand back to Jean-Marie, we can take a look at the quarterly performance of the group since the start of 2021, which is always nice to do, to help visualize this quarter in context and our recent performance as a whole. And as can be seen from the graph, this clearly shows the offsetting impact of these two key events of the quarter, which I've already mentioned, FTX and FlowBank. But, you know, behind these exceptional items, we've got an underlying business which is consistently posting solid EBITDA, and we are hoping that 2024 will ultimately look to rival 2021 in terms of overall performance. Finally, I'd just like to remind everyone that the information we've touched upon here is included within the full earnings report released earlier today. Now, I will hand back over to Jean-Marie.
Thank you, Richard, for this financial review. Okay, so now let's get back to our business lines, and as usual, let's start with our asset management business. I'm pleased to report our European Physical ETP platform, also known as CSDS, achieved its third-best quarter in terms of net flows since its inception in 2021. The platform attracted $67 million of net inflows. Particularly noteworthy is our CoinShares Physical Bitcoin ETP, which led the pack with $55 million in net inflows, the highest among all Bitcoin ETPs in Europe for Q2. These results are especially encouraging, as they indicate the fee reduction we implemented in Q1 was the right decision. We believe this, coupled with our product structure, far better than our crypto native competitor, is resonating well with our client base and client needs.
It's worth mentioning that while our Ethereum ETP saw some outflow, this was a trend observed across the industry rather than specific to our product. Our legacy XBT Provider platform continues its transition phase. We saw $131 million in outflow as investors realizing gains, but this represents a significant slowdown from Q1, where we observed $238 million of outflow. We anticipate this trend to stabilize as the market continues to trade sideways. Shifting our focus to the United States, we've made substantial progress following the Valkyrie acquisition. Our efforts have centered on product development and refining our marketing and distribution strategies. Our spot Bitcoin ETP, BRRR, brought an additional $44 million of inflow this quarter. While this is a decrease from Q1, it is in line with the broader industry slowdown.
We remain confident in BRRR competitive positioning in terms of fees and liquidity. This is really a table-stakes product for CoinShares. However, we didn't join the Ethereum race, as staking is a critical component of Ethereum protocol. As such, we abstain, and early results from our competitors, combined with the fee pressure, is supporting this decision. Our Bitcoin Mining ETF, WGMI, or "We're Gonna Make It," continues to attract investor interest, pulling in $14 million in net new inflows in Q2. This performance is particularly encouraging given the specialized nature of this product and the fact that for the time being, we didn't engage in any active marketing for it. Moving on to our Capital Markets and Hedge Fund Solutions division, it's encouraging to know that our capital markets team successfully navigated the quarter's challenges. Despite a non-trending market, they effectively capitalized on basis trading and market-making opportunities.
The team demonstrated agility in managing two significant but offsetting market events: the downward pressure from the Iran-Israel conflict and the upswing, driven by anticipation of spot Ethereum ETP listing in the U.S. and a potential Trump election. Our Hedge Fund Solutions division maintained performance within our risk parameter, so they didn't outperform the underlying asset this quarter. However, with macro event risk declining and the prospect of spot Ethereum ETPs on the horizon, we remain optimistic about the long-term potential of our business and EIS product. A notable development this quarter was the successful launch of Matrix, our new trade execution and risk platform. This sophisticated system, equipped with advanced algorithm and enhanced risk management capabilities, represent a major step forward in our operational infrastructure. We anticipate that Matrix will drive growth and increase sophistication across our capital market and insurance solution division in the coming quarters.
So let's turn our attention to our principal investment and dividend policy. We faced a significant challenge this quarter with FlowBank Holding SA. Following regulatory action by FINMA, the Swiss regulator, we have made the decision to impair this holding in full. While this is undoubtedly a setback on which we have very little control, I want to emphasize that our investment portfolio remain diverse and resilient. Our key remaining investment, our combined holdings, a long-standing and valuable commercial partner, and WAO Holdings, which resulted from the merger of Choice and WAO Holdings late last year. The latter has already yielded a cash distribution, and we are optimistic about its future performance based on its profitability to date. Coming back to shareholder value and how to translate the business success into shareholder value, our board has approved an exceptional dividend following the successful sale of our FTX claim.
We believe this balanced approach is particularly important in the current economic environment, characterized by high interest rates and market volatility. We want to provide value to our shareholders through dividends, while simultaneously reinvesting strategically with a close eye on ROI in our long-term growth initiative. This dual focus allow us to maintain our competitive edge in the rapidly evolving digital asset space, while also acknowledging the loyalty and patience of our investors during these dynamic market conditions. Lastly, I'd like to highlight our progress in investor relations. This quarter saw tangible results from our strategic investor relations efforts, with coverage initiated by respected Nordic firms like ABG Sundal Collier and Redeye. Their analysis present an encouraging outlook for CoinShares.
We have also launched a new comprehensive investor relationship website to enhance our communication with the investment community, and be more in line with the standard Nordic investors are used to and expecting from us. As we conclude our thirteenth quarter as a public company, I am filled with optimism about our prospects for the rest of the year and beyond. Despite the challenges we are navigating, CoinShares has evolved into a stronger, more focused, and continually growing enterprise. Our diversified business model, strategic investment, and unwavering commitment to innovation position us well for future success.
I think that's it for today. So thank you for your attention to this Q2 2024 earnings report. We are really looking forward to keeping you updated on our progress in the quarter to come, as we continue our mission to deliver value to our shareholders. On that note, operator, you can now open the call for question, please.
Thank you, Jean-Marie. We've got a number of questions to get through today, so we'll get straight into those. The first, which comes from Miloš Sznajder from Edison Group, and the question is: What is your plan with respect to your principal investments portfolio going forward? Do you intend to focus on existing holdings or expanding the portfolio over time? If so, what businesses would you be interested in? Richard, I think that one's for you.
Sure. Thanks, Jeri. So yeah, I'd say there's more of a focus on existing holdings rather than expanding the portfolio. As we saw in the presentation, over the course of this year, we've seen a fairly sizable reduction in the size of the portfolio. Firstly, through the impairment of FlowBank, and secondly, through the successful sale of 3iQ, which was completed in Q1. After you know, taking into account those movements and looking at the rest of the portfolio we have, as Jean-Marie noted, it's fairly diverse. We've got a couple of larger holdings in there still in WAO Holdings and Komainu, and a number of smaller investments. But in terms of exploring new opportunities, we haven't added anything for a while, nor have we actively looked to add anything for a while. But as with every potential opportunity, we'll continue to assess opportunities on an ongoing basis.
Great, thank you. The next one's for you, Jean-Marie, from Miloš again. Do you see any indication that some of the larger European markets, which are currently closed to retail crypto ETPs, such as the UK or Italy, could introduce these products for retail investors in the foreseeable future?
Thanks, Jean. The UK market has been open now for a bit longer than a month. The stance of the FCA and the UK FCA of this market has been to keep it open only for institutional investors, and so far, the adoption has been pretty insignificant on that side. So, until the market is opening for retail, I think we'll not see some real adoption in the UK. And that is same thing for Italy, where there is a very dynamic market when it comes to the private banking sector.
Perfect. Thank you. Another one for you, Jean-Marie, from Miloš. What is the potential impact of the recent market movements on your trading activities within CSCM?
Yeah. Okay, so we're talking about yesterday, probably, and the day before. Look, the desk was positioned, the desk was, you know, not taking directional risk. Our margins were in place, everything was running as it should be, and new MATRIX platform was redeployed, and fully operational. So we kind of weathered that, as a normal BAU. The BAU just happened to be overnight, so it was a bit of a long 72 hours. But outside of that, everything is working, banking part is working, exchange by, counterparty by working, and all our lending partners are all in good shape, as of last night. So nothing more to report in terms of issues or potential issues.
Great, thank you. We've got a few questions now from Kevin Dede at HCW. He mentions that you referred to product development for the U.S. market, and he understands that you'd obviously prefer to keep some of the information closer to your chest. But he'd love to know what your thinking is, how you believe new funds would be differentiated, how much management involvement would be required, and what fee range differential would be applied to such asset growth?
Kevin always like to treat me like this, that's his style. But, you know, he know very well we are bound by the market abuse regime, and there is only information we can disclose to the entire community as, when it's ready, and also, we need to be aware of competition. So there is a, you know, we're doing that on purpose, not because we want to keep it close to our chest. It's very well socialized internally, actually. You know, the way we think about our US expansion, more specifically to come back to your question, Kevin, is that, we have zero chance to compete with, BlackRock credibility, and we're very, lucid about that.
However, at the same time, we know the American market is housing 50% of the asset under management in the world. So the idea is for CoinShares to be able to capture a crumbs, big crumbs or bigger crumbs, which would make a difference and impact on our profitability, on our revenue first and on profitability second. To do that, we are not looking at fighting on the, on the retail ETF, for instance, especially if there is no staking of going against the value of the protocol. So we don't want to support that. And, you know, for 20 basis points, when you see Invesco raising $12 million in the first day of trading, for the... That doesn't even recover your cost of legal.
So the way we approach that, say, okay, we have already a mining ETF, which is a unique product worldwide. It's called WGMI, or We're Gonna Make It. It is performing extremely well and is the only product giving access to Bitcoin mining and Bitcoin miners as a investment vertical. And that's pretty cool. And the idea is like, okay, how do we create more differentiated product like this one in the US, while at the same time playing within the framework, which is the one given to us by the SEC at this time? Of course, this framework gonna evolve following the US presidential election, and probably a new regime at the SEC or a new leadership at least, and we'll see from there. So we want to be ready.
We're also looking how we can benefit from the, I would say, bridging between our European business and our American platform and see if there is some value add which can be created. As an example, CoinShares was the first one to introduce in the US a proper ETN back in 2018, thanks to Ryan Radloff, called CXBTF, which was an F share program. So, there is plenty of innovation we can bring from Europe to the US, and we're looking at that very closely.
Thank you, Jean-Marie. Richard, one for you from Kevin. In preparing for a potential U.S. listing, what regulatory and accounting changes must be addressed? When should we expect to see these manifest in reported figures?
Thanks, Cherry. So if we were to list in the US from an accounting perspective, given we currently present under IFRS, and we are not, from a US perspective, a domestic issuer, there wouldn't actually be any requirement for us to change our accounting standard. But I think a kind of wider point of this question is perhaps, you know, whether or not we could benefit from the new accounting standards under US GAAP, specifically for digital assets that are active from January 2025, but available for early adoption now, which isn't the case under IFRS. As many people on this call probably know, we've long since suffered from this accounting treatment as it, you know, distorts our P&L very heavily, you know, the treatment of digital assets as intangible assets.
So I think regardless of whether we're, you know, looking at a listing in the US, what we are looking at is ways in which we can either adopt or, you know, transition a accounting standards to US GAAP to benefit from the digital asset accounting treatment that's now being introduced. Whether that involves a full transition of accounting standard and we move away from IFRS, or whether we explore other ways in which we can benefit from that presentation, I can assure everyone that's something that we're looking at very actively at the moment.
Rich, can you save us from Kevin's next question? It will be about the new functional currency.
Sorry, say again?
Can you save us from Kevin putting another question, which is gonna be about functional currency, so we stay on the same question?
Sure, sure. Yeah, so, you know, another thing that we are considering on an ongoing basis is whether or not we transition our functional and presentational currency from GBP into USD. You know, as time goes on, it's becoming more and more apparent that that would be more beneficial for us and more suitable for the presentation of our financials. The more eagle-eyed amongst you will notice from time to time, we have a very large movement through other comprehensive income, which is FX on consolidation, which is driven by the movements between GBP and USD.
And because the vast majority of our assets are in a subsidiary presented under USD, and with a functional presentational currency that is USD, there's an argument there for transitioning the entire group in that direction, thus mitigating those larger movements we see through OCI. It's quite, quite connected with the accounting standard question, and I think, just broadly speaking, we're always looking at the best ways under whatever standard to make sure that the, you know, the presentation of our financial performance is as understandable as possible to the reader.
Thank you, Richard. Back to you, Jean-Marie, another one from Kevin: "Why would CoinShares choose to dividend the value of the FTX recovery to shareholders when that money could be used to build CoinShares business, either through acquisitions or geographical spread, i.e., Asia and the Middle East?
All right, that's a fair question, actually. So when FTX happened, our stock was running at €0.80. We recovered that money, and our stock is still trading as of today, it was in the red a couple of months ago, at €0.50. The shareholder, which are with us for a long time, has demonstrated a very strong, loyalty to the brand and a loyalty to the management and what they were doing. And as such, has been enduring CoinShares pain, so it's also normal to reward them for enduring the pain with management, which has been kind of, in the trenches for that long. So that's the first point.
The second point is, it seems to me that, CoinShares balance sheet is quite bloated to some degree, and quite heavy on assets, and as a result, on data center value at least, and that the market is not paying for that. So dividending some of it is also a way to reduce this balance sheet, I would say, bloating. And third of all, on the question about other acquisition and other expansion, we have other ways to fund this acquisition through debt. We have countless of provider happy to bring us debt structure, whether through private lending, through big credit hedge fund or through banking infrastructure, so two avenue there.
And then at the same time, if we ever want to raise money from shareholders or from other shareholder, the fact we are able to also give them back money will incentivize them even more to give us back some money. So it's a question of by being able to get and to give at the same time, and not to just like be only taking from shareholders. So it's a, it's kind of a balanced approach, I would say.
Thank you, Jean-Marie. Another one for you from Kevin: "How are you thinking about unifying the CoinShares and Valkyrie brands? Would it be through increasing marketing spend or potentially other promotional activities?
So unifying marketing brands, like, is a plan which is in full deployment. I think we have our new website starting to be deployed for the US, which will include the US into it, and coming up online during the current summer. And the idea is by the end of the year to be in a position to have a fully online and unified branding for CoinShares, both in Europe and the US.
Thank you. Can you provide a little more color on what exactly happened at FlowBank? What do you expect to come from these bankruptcy proceedings, and whether there's any chance of any clawback on the investment?
Yeah. So I'm going to be careful here about what I said, because obviously, I'm suspecting there would be some, you know... Yeah, it's, I just need to be careful about how we try to, we make these statements. But, you know, the FINMA came out and the Swiss government, the federal government came out in 2017 with a very forward-looking law when it comes to crypto and how to make crypto, a very, very prominent industry in Switzerland, and so Crypto Valley. And, I would say last week, FINMA came out with a new kind of set of measure about how to regulate crypto, which is basically killing crypto in Switzerland, or pretty much making it, killing.
So FlowBank, in this situation, adds a unfortunate characteristic to our key shareholder, which was, and it's public information now, who was the sister of Changpeng Zhao. FlowBank had a very successful business development with Binance and many other stable coin provider and many other kind of crypto company, and that basically didn't float well with Switzerland. And as a result, the bank was put in liquidation. I can't pronounce myself on our chance to recoup some, some of the, you know, some of the rights of which it put in the books. However, what I can say for sure is, like, we are studying all the possibility which are at this portal to be able to recoup this investment.
Great. Thank you very much. Again, from Kevin, for you, Jean-Marie: "Can you provide some more detail on the Matrix platform, when it will go live, and what sort of efficiency gains or de-risking capabilities you expect to see from it?
Yeah, I think the idea, when you think about Matrix, is the current platform was built by our friend and colleague, Pierpaolo. Since 2014, it was built for a single user. It was built without thinking about crypto becoming akin to security, at least in the way it is regulated in Europe or the MiCA. So plenty of things were moving, like pre-trading, post-trading consolidation, account management, audit trail, all this kind of stuff you want to get, redundancy, system maintenance windows, kill switch. You know, all the kind of stuff you would expect from a proper, grown-up OEMS platform was not there. It was very difficult. It was really designed as an algorithmic platform to be run from the terminal, by people who understand how to manipulate the terminal.
So this is really kind of like taking to the next step, where we can deploy tools at much scales and give our traders opportunity to make sure the algorithm are in the market, deploy the market, modify parameter on the fly, and be able to effectively have a better understanding of the ROI of every single strategy, and not just look at the book as a big, big book, and just say, "That's what it is." So, you know, we give us a much more fine-tuning of our operation, a much more fine-tuning of our cash management, of our margin management, of our lending counter parties, and overall a better complete visibility of our entire business from a capital market point of view. So that's where we are.
Thank you. I'll, I'll let you take a breath now. Jean-Marie, we'll back over to Richard.
Thank you, Kevin.
Richard, from Kevin again, AUM declined across the board from Q1 to Q2. What's the best explanation for this, and how influential were the outflows and asset price declines?
So the easy answer to this question is it's basically all asset price decline. So we moved from GBP 4.7 billion AUM, as at the end of Q1, down to GBP 4.2 billion, so a decrease of GBP 500 million. And if we look at the, you know, the flows on in the various products, we've had about GBP 100 million outflow on XBT, but that was more or less offset in full by GBP 50 million inflow on CoinShares Physical, and then an inflow across a selection of the Valkyrie products. You know, Jean-Marie mentioned we saw $40 million of inflow in the quarter on WGMI. So largely speaking, the the flow across all of the AUM was kind of neutralized, inflow from all the other all the products, with the exception of XBT. The reduction that we saw over the quarter is purely price related.
Great. Thank you very much, Richard. Another one for you from Kevin: Admin expense was up almost GBP 1.7 million sequential in Q2. What was the reason for this, and should we expect that to continue throughout the year?
So there's a few reasons, probably three main reasons, for that increase. First of all, Q2 is the first full quarter in which we've had Valkyrie in the group. It joined right at the end of Q1, so there's an element of increased cost there. But that's largely offset by the management fees that are coming in there, which were around $500,000 for the quarter. And then the other two factors that drive that are predominantly an increase in the bonus accrual, which is a function of our performance. The better we perform, the more we accrue to remunerate the staff that make the performance possible.
And also there's a share option expense within there as well, which is driven by the price of the share. So in terms of do we expect that to continue through the year? A portion of it, yes, but being offset by higher management fees from Valkyrie, and then the other two are dependent on the overall performance of the group and the share price itself.
Thank you very much. Moving on now from Kevin's questions over to Albert Möller from ABG. Richard, if you could take this one. Do you expect net working capital to increase when the AUM grows, or will it be mitigated by expected realizations in the XBT Provider products? We appreciate that there are many moving variables, such as price and net flows, but any color would be helpful.
Sure. So I think the one thing to remember as AUM grows, it's growing because of the, you know, the products that we issue that are collateralized and hedged. So you'll have an asset that's moving largely in line or almost entirely in line with the liability. So that's not really gonna have an impact on your net working capital. Realizations in XBT Provider, 'cause of the structure, they're actually released cash. But having said that, when AUM grows, and we've got a larger balance sheet, and we've got more means to deploy within capital markets, that's gonna indirectly impact working capital because we've got more firepower to deploy, and therefore we're gonna make more gains and realize more cash.
Thank you, and another from Albert for you, Richard. Costs were slightly higher in Q1 2024. Is this a new run rate, temporary investments, or just seasonality?
So similar answer to Kevin's question, which focused on admin expenses. But if we're looking at costs in their entirety, we also had an increase in our direct costs. But that is largely due to you know, higher custody fees 'cause of higher AUM when compared to previous periods. So on the direct cost side, if our AUM stays where it is, we can expect to see these being fairly static. And then on the admin expense side, that's just refer to my previous answer to Kevin.
Great. Thank you, Richard. One for you, Jean-Marie, from Albert: Is there any information on the AUM inflows into the hedge fund solutions? Are we building a track record before onboarding any external clients?
That's a simple point. So we are building a track record before onboarding some clients. And in the same vein, we hired a lady in the U.S. to be focused specifically on starting to approach LP, and this is about the best way to monetize and this hedge fund solution product and to bring LPs on the platform. So, work in progress.
Thank you very much. Back over to you, Richard, from Albert. There was a partial reversal of the FX/other gains in the capital markets division. Is this a zero income line over time, or should we expect a slight positive contribution?
The other line within capital markets tends to be a catchall for some of the smaller activities that are undertaken by the capital markets team, inclusive of FX. So the FX element will tend to ebb and flow over time, more or less neutralize over a longer period and because of the trading activities undertaken by the team.
But also within that number, we'll have other things such as airdrops, for example, or short-term digital asset gains on some of our prop assets. So I would say a slight positive contribution over time. But similarly, as the activities sort of change over time in the capital markets, as they always do, there will be elements of that other line that merit their own disclosure on their own line that will grow out of that other, that other line and be presented separately.
Great, thank you. We've received a few questions from Rasmus Jacobsson from Redeye. Richard, first one for you: did you receive the FTX proceeds within the quarter?
It's a nice, nice easy one. Yes, we did. When we wrote those assets off back at the end of 2022, you know, despite having received over the intervening period multiple offers to sell the claim, et cetera, even though we knew that there was a receivable amount there, we elected not to recognize any of that until the cash had hit the account in the interest of prudence. So yes, with the gain is reflected in the accounts occurred concurrently with the receipt of the funds.
Sorry, there was an issue with the mute button there. Another one for you, Richard, from Rasmus at Redeye. Is the current delta-neutral earnings level deemed sustainable? What are the underlying factors resulting in this performance?
The underlying factors that result in the performance are the, you know, it's the capabilities of the team, the volatility of the market and the factors in the wider market and what we have available to deploy. Some of those things are within our control, and some are not. We made a point at the end of Q1, 'cause the delta neutral trading activities were muted over Q1. We made a point in the previous earnings announcement to say that we expected them to be higher in Q2, given we knew we'd deployed a number of new strategies, and just looking at the activities of the market, I would...
It's hard to say exactly where they will land on an ongoing basis, but what I can say is the team is poised to take advantage of the market when it moves in certain ways. I would like to think that we are always able to maximize that number, although it's very difficult to say what that number will be.
Thank you. Another for you. Can you confirm whether the reported AUM is as at the end of the quarter and not an average for the period?
Yep, can confirm that. So we were talking about our level of AUM before. It moved from $4.7 billion at the end of Q1 down to $4.2 billion at the end of Q2, and that is indeed the month close number.
Thank you, Richard. Over to you, Jean-Marie. How do you think the fact that staking rewards are not accessible for Ethereum ETF investors will affect the demand in your products?
I think they are accessible. They are not accessible on the provider. Right now, they are accessible on CoinShares Digital Securities. They are not accessible in the US product. So, you know, if people want to get a CoinShares product with staking, it is available, so I don't see it as a problem for people accessing our product.
Okay, thank you. Can you give us some more information about hedge fund solutions? What has been the response from potential LP, LPs?
Oh, but it's, we're already onto this question. Which one like?
Oh, about the external kind. Yeah, okay, fine. We'll skip that one. Do you see any acquisitions on the horizon? What areas do you see the most potential in?
So obviously, we are bound by market abuse regime again, so we can't really make any forward-looking statement. But it's fair to say that the, myself and the ExCo, and to some degree, sometime the board, are reviewing opportunities on a fairly regular basis, and we always have a few opportunities, we're looking at. So it's a question of when is the right opportunity and not to make, you know, fast move for fast move.
So we are very agile, we are very aware of what is going for sale in the market. There is a few of our competitors for sale right now in the market. Yeah, doesn't mean we need to buy them, but we can also look at them. So we are very pragmatic when we look at it and reviewing with you on a one-to-one basis, and if they want, they won't be at risk.
Thank you, and I suppose, in connection with the previous question regarding Ethereum products, do you have any plans to offer Ethereum-related ETFs in the U.S.?
Well, we said that earlier, that we were not doing it because there is no staking in the US available, and that will be a shame for this protocol to be launched in the US in 2024 without staking. So... And that's what probably, you have such a low adoption right now in Ethereum in the US. So we will only do it if there was a way to get staking done properly. And again, at that time, it will be reviewed with other lenses in terms of market demand and market, product market fit, not just staking.
Perfect, thank you. That brings our list of questions to a close. We'd like to thank everyone today for joining the call and wish you all a lovely rest of the day.