Arcane Crypto — Bitcoin mining project has come on stream

Arcane Crypto (OMX: ARCANE)

Last close As at 21/11/2024

SEK0.03

0.00 (−3.45%)

Market capitalisation

SEK252m

More on this equity

Research: TMT

Arcane Crypto — Bitcoin mining project has come on stream

Arcane Crypto has successfully launched its bitcoin (BTC) mining operations (powered by renewable energy) in October after the delivery of the first batch of mining equipment (the second batch is due to be shipped in January 2022). As a result, management expects the group will become cash-flow positive from Q122. The company has also launched the first iteration of its unified tech platform (aimed at becoming the ‘one-stop-shop’ for several products offered by the Arcane Crypto group). Meanwhile, its Q321 results reflect the more muted activity in digital asset markets during the quarter after the sell-off in May.

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

TMT

Arcane Crypto

Bitcoin mining project has come on stream

TMT

Spotlight - Update

5 November 2021

Price

SEK0.195

Market cap

SEK1,660m

Share price graph

Share details

Code

ARCANE

Listing

Nasdaq First North

Shares in issue

8.51bn

Last reported gross cash at end-Q321

SEK47.5m

Business description

Arcane Crypto is an investment company acquiring and developing early-stage businesses in the blockchain-powered digital assets sector as part of a ‘buy-and-build’ strategy. It has several fully owned and minority-owned businesses across payments, trading, asset management, BTC mining, research and media. It has been listed on the Nasdaq First North alternative market since February 2021.

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 assets adoption.

Several competing payment solutions to the Bitcoin Lightning Network.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Arcane Crypto is a research client of Edison Investment Research Limited

Arcane Crypto has successfully launched its bitcoin (BTC) mining operations (powered by renewable energy) in October after the delivery of the first batch of mining equipment (the second batch is due to be shipped in January 2022). As a result, management expects the group will become cash-flow positive from Q122. The company has also launched the first iteration of its unified tech platform (aimed at becoming the ‘one-stop-shop’ for several products offered by the Arcane Crypto group). Meanwhile, its Q321 results reflect the more muted activity in digital asset markets during the quarter after the sell-off in May.

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)

N/A

N/A

N/A

N/A

Source: Arcane Crypto

Q321 revenue down c 19% vs Q221 on lower volumes

Arcane Crypto’s revenues were SEK81.2m in Q321 vs SEK100.3m in Q221, primarily affected by the c 23% decline to SEK75.3m in gross turnover of the crypto broker Kaupang (accompanied by a somewhat lower gross margin of Kaupang at 2.0% vs 2.5% in Q221). This was associated with lower trading volumes in the broader digital asset market. Consequently, Arcane Crypto’s EBITDA loss was SEK6.1m (vs SEK8.3m in Q221 when adjusted for the reversal of accrual of social charges). It also recorded a loss from associates at SEK1.3m (including the financial result of Puremarkets, Alphaplate and LN Markets). BTC mining was launched after the reporting date so has not contributed to the company’s results.

Making progress with its unified platform

In terms of major portfolio developments, Arcane Crypto has rolled out the first version of its Arcane platform to offer several of the group’s products under one roof. It also started consolidating the retail crypto exchange Trijo from Q321. Kaupang continues to enhance its premium offering for large private and corporate clients and has rolled out a recurring buy feature. Arcane Assets continues to pursue the launch and listing of an exchange traded product based on its hedge fund (expected early next year). Arcane Research experiences good demand for its institutional-grade research. Arcane Crypto has also made several new hires, including a new CFO and CTO, and is in the process of appointing a new chairman of the board (with Michael Jackson replacing Jonatan Raknes).

Valuation: Price of recent issue set at SEK0.203

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

Q321 results reflect more muted digital asset markets

Arcane Crypto posted a SEK7.8m loss in Q321 compared to a SEK2.8m loss in Q320 and SEK7.1m loss in Q221, although the Q221 figure includes a positive SEK6.9m one-off item from the reversal of accrual of social charges related to warrants in Arcane Crypto. It generated a revenue of SEK81.2m in Q321, which primarily includes the gross turnover of Kaupang Krypto (SEK75.3m) and revenues from Arcane Assets (SEK3.5m vs SEK2.7m in Q221) and Arcane Research (SEK1.4m vs SEK0.7m in Q221). Moreover, Arcane Crypto’s top line now includes the retail exchange Trijo, which became a 100% subsidiary from 2 July 2021 and generated c SEK0.5m in deposit and withdrawal fees in Q321 (no data available for Q221) as it has not yet started charging trading fees (see our previous notes for details).

Exhibit 1: Q321 results highlights

SEK000s

Q321

Q320

Q221

Q121

FY20*

Revenue

81,165

571

100,296

2,094

1,941

Other operating income

1

0

76

63

162

Total revenue

81,166

571

100,372

2,157

2,103

Cost of goods sold

(73,722)

0

(94,835)

N/A

N/A

Personnel costs

(7,730)

(2,197)

130

(8,846)

(8,992)

Other external expenses

(5,773)

(1,459)

(7,151)

(4,354)

(10,923)

EBITDA

(6,059)

(3,085)

(1,484)

(11,043)

(17,812)

Adjusted EBITDA**

(6,059)

(3,085)

(8,349)

(3,568)

N/A

D&A, including write-downs on intangibles

(2,046)

(48)

(1,063)

(36)

(66)

EBIT

(8,105)

(3,133)

(2,547)

(11,079)

(17,878)

Profit from participation in associated companies

(1,259)

448

(3,138)

447

37

Interest income and other financial income

2,260

8

(1,581)

1,606

1,193

Interest expenses and other financial costs

(662)

(156)

210

(127,024)***

(228)

Profit before tax

(7,766)

(2,833)

(7,056)

(136,050)

(16,876)

Income taxes

0

0

0

0

0

Net income

(7,766)

(2,833)

(7,056)

(136,050)

(16,876)

Adjusted net income****

N/A

N/A

N/A

(9,097)

N/A

EPS (diluted, SEK)

(0.001)

(0.005)

(0.001)

(0.016)

(0.031)

Source: Arcane Crypto, Edison Investment Research. Note: *Results of Arcane Crypto. **Adjusted for the accrual/reversal of accrual of social charges related to warrants in Arcane Crypto in Q121 and Q221. ***Includes SEK126.9m one-time accounting effect arising from the reverse takeover. ****Adjusted for the one-time accounting effect arising from the reverse takeover.

Kaupang’s trading volumes down sequentially amid lower broader market activity

Kaupang posted a c 23% decline in gross turnover versus Q221 (SEK97.2m) amid more muted activity in the broader digital assets market (aggregate BTC volume in the market was down 41% during the quarter, according to the management). This is broadly in line with Safello, one of Kaupang’s two major local listed competitors, which experienced a 28% revenue decline in Q321 vs Q221 (the other competitor, GooBit, has not reported its figures for the quarter ending October 2021 yet). Meanwhile, Trijo’s gross trading volume was close to SEK40m, only slightly down from the c SEK40m in Q221, with a 150% increase in volumes experienced after the launch of the cooperation with the payment services provider Trustly on 30 July 2021.

Kaupang’s gross profit was SEK1.5m versus SEK2.4m in Q221, translating into a gross profit margin of 2.0% versus 2.5% in Q221. While its two listed competitors generated a higher margin in recent quarters (suggesting higher average fees), we note Safello (which reported a 5.6% and 4.6% margin in Q321 and Q221, respectively) announced on 11 October it will lower its transaction fees, expecting a margin decline of c 50–75bp (all else being equal). Also, we note Safello charges a much lower 2% transaction fee to business and high net-worth clients (who are the main target group for Kaupang) versus 4–5% for retail clients. Overall, Arcane Crypto’s gross profit (which includes revenue from Arcane Assets and Arcane Research) reached SEK7.5m in Q321 after SEK5.5m in Q221 and management expects substantial growth over the coming quarters (which will be assisted by the recently launched mining operations, see below).

Associates remain in ramp-up stage

Arcane Crypto’s EBITDA loss reached SEK6.1m in Q321 versus SEK3.1m in Q320 and SEK8.3m in Q221 (adjusted for the above-mentioned reversal of accrual of social charges). It has also booked a SEK1.3m loss from participation in associated companies (Puremarkets, Alphaplate and LN Markets). Alphaplate reported a loss of c £100k (or SEK1.2m) versus a SEK1.6m loss in Q221 and a SEK3.2m profit in Q121. We estimate that around SEK527k of the Q321 loss is attributable to Arcane Crypto given its 45% stake in the business. Alphaplate recently focused on the integration with Zodia Custody as a market maker (which is now complete) and continued to act as a market maker on the Trijo exchange. Puremarkets has completed a successful test trade on its Pure Digital platform via Zodia Custody. The next step involves further test trades between the investment banks who joined the consortium (which we understand is subject to further regulatory clarity). Meanwhile, LN Markets (operating a derivatives platform based on the Bitcoin Lightning Network) reported a trading volume of US$53m (c SEK450m), down by 19% q-o-q from US$65m (c SEK552m) in Q221, which in turn was down more than 25% vs the US$88m in Q121. LN Markets has recently added a market data visualisation module for options and is now developing an options trading module (based on a broker model). Arcane Crypto recorded a positive financial result of c SEK1.6m in Q321 (vs a negative SEK1.4m in Q221), which we believe may at least partially reflect gains on Arcane Crypto’s minor cryptocurrency holdings. The Q321 results also include some minor setup costs associated with its BTC mining operations.

Additional funding provided for the acquisition of mining equipment

The company’s cash position at end-September 2021 was SEK47.5m (vs SEK33.5m at end-June 2021), assisted by the directed issue of 300.9m units, each consisting of one share and one warrant entitling the holder to subscribe to one newly issued share, completed on 30 August. The issue was carried out to ‘a group of qualified investors with a proven interest in Arcane Crypto and the crypto currency sector’, according to the company’s press release. The issue price was SEK0.203 (in line with the closing price on the preceding trading day), while the subscription price of the warrants stands at SEK0.2436. The issue will (on full exercise of the warrants) result in a c 6.85% dilution, but has allowed Arcane Crypto to raise gross proceeds of SEK61.1m from the share issue (and potentially a further SEK73.3m on full exercise of the warrants). Part of the proceeds have been used to purchase the first batch of BTC mining equipment for c SEK36m, with the cost of the second batch ordered in October 2021 at SEK28m. The management expect the mining operations will allow Arcane Crypto to become cash flow positive starting from Q122.

BTC mining operations launched post Q321

A key recent highlight of Arcane Crypto’s development is the ramp up of its BTC mining operations. Management confirmed mining started just after the end of Q321 based on the first batch of 352 application-specific integrated circuits (ASICs), which we estimate represents a total hashrate of 38,720Th/s. The second batch of 360 ASICs with a hashrate of 36,000Th/s is due to be delivered in January 2022. We estimate that on full deployment and based on the current network state (including a global hashrate of c 160 Exahash/s and BTC price at US$61.5k), Arcane Crypto’s mining operations would generate c US$9.4m of annual revenue. The company entered into an agreement to sell its processing power to the mining pool Luxor Technologies to smoothen out the revenue from BTC block rewards and transaction fees.

Management has not disclosed details of the operating costs related to the mining operations but confirmed that even at the current high electricity prices in Norway, the operations are ‘highly profitable’. Nevertheless, in the long run it may consider setting up further mining operations in other geographical locations to diversify the risk associated with changes in electricity prices in the respective local markets. Arcane Crypto does not intend to accumulate the mined BTC on its balance sheet but will rather sell it or use in the flow of its other businesses (eg to maintain liquidity in the Lightning channels). Having said that, it will also consider deploying derivative strategies to further enhance its profit on the mining operations (with the simplest being the sale of BTC futures contracts to collect the premium during a market contango). Management also flagged that at some stage the company may consider offering mining-as-a-service solutions to its client seeking exposure to BTC mining.

With respect to other major portfolio developments, Arcane Assets continues to work with Valour Structured Products on introducing an Exchange Traded Product based on the former’s hedge fund. While it is a complex process from a regulatory perspective and the technical standpoint (eg assuring sufficient liquidity and intraday pricing for the hedge fund), management expects to launch the product early next year. The company is also exploring the opportunity of becoming depository-lite compliant to be able to market the fund to EU investors. Kaupang has launched an insured custody offering as part of its premium services to large private customers and corporate clients and has rolled out a recurring buy (ie dollar-cost averaging) feature for all users in Q321. The integration with Teslacoil has been put on hold pending further developments of the new unified Arcane platform (which will introduce a ‘one-stop-shop’ approach to Arcane Crypto’s offering, see our previous update note for details). The first iteration of the platform has recently been launched. Arcane Research sees good demand for institutional-grade crypto research as illustrated by, among other things, a 25% sequential growth of the subscription base of the weekly market report in Q321; demand for Arcane’s consulting services; weekly press coverage; and continued partnerships, eg with BlockFi. In response to this demand, the company has doubled its research team so far in 2021.

We also note a number of important additions to Arcane Crypto’s team. Natalia Goldin Lundh joined the Arcane Assets team as head of investor relations and business development, Oisin Zimmerman has become Arcane Crypto’s new CTO and head of product (he was previously senior vice president of product management at DNB), while Linus Jönsson joined as CFO. Moreover, on 28 October 2021, Arcane Crypto’s nomination committee proposed that Michael Jackson was elected as chairman of the board and Sϊmon Saneback was elected as a new member of the board. Jonatan Raknes will resign from his position as chairman and member of the board, while Anna Svahn, Kristian Kierkegaard and Viggo Leisner will remain members of the board.

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

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 2021 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.

More on Arcane Crypto

View All

Latest from the TMT sector

View All TMT content

Research: TMT

PSI Software — Energetic results across the grid

PSI Software (PSI) develops and integrates process control software solutions for energy grid operators, manufacturing and logistics. Business in the first nine months of 2021 (9M21) rebounded from the COVID-19-affected prior-year period, with sales and new orders increasing, while multiple key initiatives and acquisitions should support results throughout Q421 and beyond. Successfully executing its transition to a software product provider, reversing the decline in its international business and expanding its margins could drive multiple expansion.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free