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Crypto Assets and Blockchain Tech: Investing Strategies and Risks

Meltem
January 25, 2019

Crypto Assets and Blockchain Tech: Investing Strategies and Risks

This was shared at "Innovate Finance" during the World Economic Forum on January 25, 201.

Meltem

January 25, 2019
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  1. Crypto Assets and Blockchain Tech:
    Investing Strategies and Risks
    Meltem Demirors

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  2. DISCLAIMER
    All opinions expressed by Meltem Demirors in this presentation are solely her opinions and do not reflect the opinions of
    CoinShares Co, CoinShares Capital, CoinShares UK, or their parent company CoinShares Holdings Limited or affiliates.
    You should not treat any opinion expressed by Ms. Demirors as a specific inducement to make a particular investment or
    follow a particular strategy, but only as an expression of her opinion. Ms. Demirors’ opinions are based upon information
    she considers reliable, but neither CoinShares Co nor its affiliates and/or subsidiaries warrant its completeness or
    accuracy, and it should not be relied upon as such. Ms. Demirors, CoinShares Co, its affiliates and/or subsidiaries are not
    under any obligation to update or correct any information provided in this presentation. Ms. Demirors’ statements and
    opinions are subject to change without notice. No part of Ms. Demirors’ compensation from CoinShares is related to the
    specific opinions she expresses.
    Past performance is not indicative of future results. Neither Ms. Demirors nor CoinShares guarantees any specific outcome
    or profit. You should be aware of the real risk of loss in following any strategy or investment. Strategies or investments
    discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned
    may not be suitable for you. This material does not take into account your particular investment objectives, financial
    situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision
    regarding investments or strategies. Before acting on information, you should consider whether it is suitable for your
    particular circumstances and strongly consider seeking advice from your own financial or investment adviser.
    See Ms. Demirors’ holdings, investments, and disclosures at www.meltemdemirors.com

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  3. NOT ANOTHER CRYPTO TALK
    @Melt_Dem 3

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  4. BITCOIN HAS BEEN THE WINNING TRADE
    @Melt_Dem 4
    Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18
    0%
    7500%
    15000%
    BTC AMZN

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  5. MAPPING BITCOIN’S INNOVATION CYCLE
    @Melt_Dem 5
    EMERGENCE
    FRENZY
    SYNERGY
    MATURITY
    Big bang Crash Institutional
    Adjustment
    Next big bang
    Time
    Degree of Diffusion of the
    Technological Revolution
    INSTALLATION PERIOD DEPLOYMENT PERIOD
    Intense funding
    Decoupling of paper
    value and real value
    Rampant speculation
    Focus on production
    Recoupling of paper
    value and real value
    Decreasing growth
    opportunities
    Source: Carlota Perez, Technological Revolutions and Financial Capital. Bitcoin price sourced from Coinmetrics.io
    Apr-13 Apr-15 Apr-17

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  6. THE 2018 GROWTH STORY
    @Melt_Dem 6
    Source: CoinMetrics.io
    BITCOIN
    $0
    $11
    $22
    Jan-15 Jan-16 Jan-17 Jan-18
    Thousands
    ETHEREUM
    $0
    $600
    $1,200
    Aug-15 Aug-16 Aug-17
    RIPPLE
    $0
    $2
    $4
    Jan-15 Jan-16 Jan-17 Jan-18
    As of 8/2018
    Up 874%
    As of 8/2018
    Up 14,408%
    As of 8/2018
    Up 2,854%

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  7. VALUE CREATION ISN’T ALWAYS LINEAR
    @Melt_Dem 7
    BOOKSTORE EVERYTHING STORE COMMERCE ECOSYSTEM
    $0
    $1,000
    $2,000
    May-97 May-02 May-07 May-12 May-17
    Source: Bloomberg Amazon daily ticker data. Logos sourced from Google images.

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  8. KEY THEMES DRIVING INTEREST
    @Melt_Dem 8
    • Rising populist tendencies
    and trade wars
    • Increasing frustration over
    centralized corporate control
    • Largest generational wealth
    transfer under way
    • Millennials and women
    invest differently
    • Crypto assets can drastically
    reduce friction and barriers
    • Desire for new investment
    opportunities
    MISTRUST GENERATIONAL SHIFT DISRUPTION
    The preference for crypto is driven by social, political, and economic factors

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  9. CHANGING BUSINESS DYNAMICS
    @Melt_Dem 9
    • Payments, particularly international/remittances
    • P2P market places for specific market places
    • Security tokens
    • Enterprise grade blockchain
    • Smart contracts growing in complexity
    EVOLUTION REVOLUTION
    Blockchain applications within existing financial
    systems and market structures
    Decentralized financial system with new primitives
    built to abstract out intermediaries (banks)
    • M1 replaced by decentralized, supranational
    stores of value
    • P2P exchange of all assets
    • Marketplaces without intermediaries or trusted
    counterparties
    • Disruption of friction costs
    The truth is likely somewhere in between these two ends of the spectrum

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  10. EVOLUTION OR REVOLUTION
    @Melt_Dem 10

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  11. A CHANGING INVESTING LANDSCAPE
    @Melt_Dem 11
    Source: Majority of return data from PitchBook 2018 Global PE & VC Fund Performance Report. IPO data from Renaissance Capital research, referencing Fidelity Investments data. ICO data from Benedetti, Kostovetsky, “Digital Tulips? Returns to Investors
    in Initial Coin Offerings.”
    STRATEGY RETURN
    Debt 6%
    Fund of Funds 11%
    Hedge Fund 11%
    Real Assets 11%
    Secondaries 13%
    VC 16%
    PE 18%
    IPO 21%
    ICO 179%
    • Global macro uncertainty and sky-high valuations
    across asset classes – Q4 2018 correction lasted
    less than one quarter!
    • Hedge funds under pressure – “blue-chip” funds 15
    – 20% below S&P returns
    • Venture investors, especially SV, raising more capital
    than ever but difficult to materialize paper marks
    • Exits less frequent – IPO valuation premium is low,
    staying private often better for juicing valuation
    • For investors who missed BTC and ETH 10,000x
    returns, the allure of “the next bitcoin” is strong
    CHANGING INVESTOR SENTIMENT
    US INVESTMENT RETURNS
    LAST 5 YRS

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  12. A CHANGING INVESTOR COHORT
    @Melt_Dem 12
    2013 2018
    2014 2015 2016 2017
    Source: Proprietary analysis using publicly available news sources.

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  13. UNTANGLING THE CRYPTO ASSET CLASS
    @Melt_Dem 13
    STORE OF VALUE MEDIUM OF EXCHANGE DISTRIBUTED LEDGER
    § Digital Gold
    § Hedge against government
    instability and seignorage
    § Potential analogs:
    - Market cap of gold
    - Money held in Swiss bank
    accounts
    § Global payment network
    § Remittance & money transfer
    § Potential analogs:
    - Some % of global
    payments volume
    - Cross border capital
    flows
    § Web 3.0 infrastructure
    § Computational capacity
    § Potential analogs:
    - FANG & internet stocks
    - Some % of the internet
    application market

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  14. REMOVING FRICTION FROM ASSETS
    WHERE WILL CAPITAL COME FROM?
    Legacy Asset Market Size Blockchain Asset Expression
    Gold $7 trillion Store of Value (SOV) Bitcoin
    Oil (Commodities) $1.7 trillion Digital Utility Ethereum
    VC $60 billion
    New blockchain protocols and
    early stage
    ICOs
    HF / PE growth
    investing
    $1.2 trillion
    Securitizing equity for private
    companies
    Security Tokens
    (STOs)
    Real Estate $1.4 trillion
    Fractional ownership and
    tokenized REITs
    Securitized Asset
    Offering (SAOs)
    @Melt_Dem 14
    Source: Global Alternatives Survey, CoinShares estimates.
    Strategies are challenging to identify as business models are still being built

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  15. VALUE CREATION AND VALUE CAPTURE
    @Melt_Dem 15
    BLOCKCHAIN TECH STACK
    Network
    Applications
    Protocols
    INVESTMENT STRATEGY
    • Venture investing via equity
    • Appcoins or “product” tokens
    • Venture investing via equity
    • Mining pool or funds
    • Direct participation in consensus
    • Venture investing via equity in parent
    • Protocol tokens
    Strategies are challenging to identify as business models are still being built

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  16. “ROLL YOUR OWN” CRYPTO STRATEGY?
    @Melt_Dem 16
    FUNCTION COMPETENCE OVERVIEW COST
    Banking and
    Custody
    Banking Services Strong relationships with transactional banks across multiple regions n/a
    Storage and Custody Robust crypto custody opsec and infosec 40 – 100 bps
    Risk
    Management
    Trade Execution Relationships with OTC desks and market makers, secondary buyers 15 – 25 bps
    Portfolio Management Tracking positions across platforms and assets, potentially liquidity 10 – 40 bps
    Re-balancing Programmatic trading, liquidating illiquid assets or investments 15 – 25 bps
    Liquidity Management Ensuring positions can be sold over time and managing cash float n/a
    Governance Network Participation
    Staking, bonding, delegation, and other types of governance activity – can
    be performance in-house but more likely outsourced
    50 – 100 bps
    Financial
    Planning and
    Reporting
    Allocation Strategy Quantitative and qualitative analysis of investment opportunities n/a
    Performance Reporting Robust performance data and tracking 10 – 40 bps
    Cash Management Accounts payable and receivables n/a
    Accounting and
    Tax
    Valuation and NAV Marking positions, especially in PoS networks or after forks 10 – 40 bps
    AUM Calculation Need to mark position values for fee calculation, must be defensible n/a
    Tax and Audit Managing any and all tax and audit liabilities across operating regions 20 – 50 bps
    Compliance and
    Legal
    Legal Review Ensuring full rights and covenants exercised, lawsuits where applicable 50 – 100 bps
    Filings Regulatory filings and licenses where applicable n/a
    Expenses ratios range from 2% to 5% for a sizeable fund, and higher for smaller funds

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  17. Crypto Asset Example
    Exchange Traded Product
    Venture Fund
    “Crypto Fund”
    Direct Investing
    IPOs
    Equities
    CURRENT EXPOSURE STRATEGIES
    @Melt_Dem 17
    Source: Global Alternatives Survey, CoinShares estimates.
    Private Equity
    10%
    Hedge Fund
    20%
    Venture
    5%
    Real
    Estate
    30%
    Equities
    20%
    Bonds,
    MM
    15%
    INSTITUTIONAL / HNW ALLOCATION HOW THEY’RE PLAYING CRYPTO

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  18. RISKS OF CRYPTO INVESTING
    @Melt_Dem 18
    IDIOSYNCRATIC RISK
    “Asset” level risk
    • Operating strategy
    • Investment strategy
    • Financial policies and
    practices ie “treasury
    management”
    • Dependence on
    “benevolent dictator”
    founders
    SYSTEMIC RISK
    “Market” level risk
    • Lack of liquidity in most
    markets
    • Limited selection of assets
    (convergence on ! = 1)
    • Regulatory changes and tax
    reform risks
    • Failure of technology
    creates “bank run”
    STRATEGY RISK
    “Manager” level risk
    • Scalability (AUM growth)
    • Style drift (chasing every
    shiny new thing)
    • Benchmark selection and
    portfolio valuation practices
    • Risk management policies
    and limits on overall
    position exposure
    Understanding risk is key to managing it effectively

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  19. NEW THEMES TO WATCH IN 2019
    @Melt_Dem 1
    MORE PRODUCTS
    § Seeing the emergence of leveraged and short structured products (2X levered short)
    § New options and derivatives contracts, including a volatility index (LXVX)
    THE ADVENT OF FINANCIAL ENGINEERING
    § All about the yield baby – more pressure on firms to leverage working capital for low-risk
    reward like lending and staking
    § Emergence of new tools to engineer on-protocol assets, especially in Ethereum ecosystem
    MORE TRADING VENUES AND EXECUTION SUPPORT
    § Agency brokers moving from commodities into crypto, offering more sophisticated contracts
    and positions
    § New regulated platforms launching, offering vertically integrated tools (re: expense ratios)

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