Evolution or Revolution: Putting Crypto in Context

Evolution or Revolution
Putting Crypto in Context
July 2019
Meltem Demirors | CoinShares
@Melt_Dem

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Evolution or Revolution? Putting Crypto in Context
This document, which is provided for informational purposes only, is intended to provide a high level overview of the CoinShares investment
philosophy adopted by certain investment products promoted by the CoinShares Group only. Nothing in this document should be interpreted as
constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group (and
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Helier, Jersey JE2 3QA. References in this document to ‘CS Strategies’ should be interpreted as being a reference to a common investment philosophy
adopted by a family of investment products promoted by the CoinShares Group. ‘CS Strategies, CS1, or CS2’ is not a reference to any particular
investment product or structure. The specific application of the ‘CS Strategies’ investment philosophy, and the actual investments held by products
pursuing it, will differ on a product-by-product basis. Each ‘CS Strategies’ investment product may have a distinct structure, including (without
limitation) in respect of fee arrangements applicable thereto, and regulatory treatment in the jurisdiction in which it is domiciled.
The information presented in this document has been developed internally and / or obtained from sources believed to be reliable; however, no
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Predictions, opinions and other information contained in this document are subject to change continually and without notice of any kind and may no
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The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited.
© 2019 CoinShares Group. All rights reserved.
Note Ms. Demirors herself is an investor in cryptocurrencies and companies, some of which are referenced in this deck for informational purposes
only. You can find her disclosures and investments at meltemdemirors.com under “disclosure” and “investments”.
Important Disclaimer

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Copyright © 2019 CoinShares Group. All rights reserved. 3
Source: Dilbert, by Scott Adams
Today’s Talk

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Scott Adams Says…

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The CoinShares Group
The CoinShares Group manages approximately $1 billion of assets on behalf of a global
investor base, with offices in London, Jersey, and New York.
PASSIVE TRACKERS ACTIVE STRATEGIES EXECUTION / FICC
XBT Provider issues publicly
listed crypto exchange traded
products (ETPs)
Top quartile digital asset hedge
fund; diversifying into new
strategies continually
Supports asset management
and services clients, portfolio
companies, and institutions
$916M AUM(1) $11M AUM(2) $125M Monthly Volume(5)
Ø
Trade up to $40M per day in
Europe
Ø
CS1 – actively traded crypto(3)
Ø
GABI Bitcoin Strategy(4)
Ø
Fixed income
Ø
Derivatives
Ø
OTC
Notes: (1) AUM amounts as of 30 June 2019. (2) Conversion from ETH to USD (3) Closed to new investment. (4) GABI Bitcoin Strategy was closed in 2018. (5) FICC volume reported based on 2018
average volumes covering 24M individual orders filled. This information appears as a matter of record only and is not intended to be an offer or solicitation of an investment in any jurisdiction where
it may be illegal to do so.

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• A Brief Walk through History
• Macro Context: Economic, Political, and Social Drivers
• Market Evolution or Financial Revolution?
• What is “crypto”?
• Exploring Allocation Strategies and Performance
• Closing Thoughts
What We’ll Cover

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Blast from the Past
A Long History of Trusted Intermediaries

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The Silk Road and the Qirad

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The Venetians and the Commenda

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The Dutch and the First Mutual Fund

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Trust: Greasing the Capitalism Flywheel
“Our financial lives trend towards convenience, and as a
result, dependence on intermediaries. It unrealistic to
expect that to change anytime soon.”
- Ryan Radloff, CoinShares

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Macro Context
Economic, Political, and Social Drivers

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MISTRUST GENERATIONAL SHIFT DISRUPTION
• Rising populist tendencies
and trade wars
• Increasing balkanization
of society via the web
• Constant revelations of
abuses of power
• Largest generational
wealth transfer under
way – or maybe not?
• Failing entitlements
• Millennials facing life-
long indebtedness
• Fundamental shift in
trust models
• Drastic reduction in
friction and barriers
• Fractional, tokenized
ownership models
The preference for crypto is driven by social, political, and economic factors
The Backdrop for Crypto

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Massive Failures of Trust

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And Massive Failures of Markets
Source: Bank of England, Eurobarometer, Gallup, Bank of Japan

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A Paradigm Shift
Evolution
Early adoption fits the existing regulated structure
Revolution
Experimentation phase takes time…
Decentralized
Financial
System
Centralized
Blockchain
Applications
DENIAL ANGER DEPRESSION
BARGAINING ACCEPTANCE
*The Kübler-Ross grief model serves as a good index of how incumbents and stakeholders alike will react as we progress through the parallel paths
VALUE TO BE CAPTURED

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A Paradigm Shift
Physical World
Digital World
Price of Physical Things = pp
Price of Digital Things = pd
Today – the digital world is valued at nearly nothing
In the Future – an increasingly digital world means pd
> pp
, creating massive
arbitrage opportunities
VALUE TO BE CAPTURED

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Market Evolution or Financial Revolution
The Forces Driving Change

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What Does a World Without Trust Look Like?
Source: Original Artwork by Cryptograffiti

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Digitization Requires Intermediaries

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“Financial institutions make people feel safe by hiding risk
behind layers of complexity. Crypto brings risk front and
center and brags about it on the internet.”
- Elaine Ou, Global Financial Access

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Bitcoin Still Has Intermediaries
Source: CoinShares Research

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Debt & Equities
Gold
Oil
Real Estate
Wine
Bitcoin
Digital
Independent
Physical
Dependent
“Tokenized" Equity
“Tokenized" Debt
Precious Metals
Mutual Funds
Bonds
$80T
$288B
“Tokenized" Commodities
But A New Model is Emerging

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Categorizing “Crypto”
The Challenge of Categorically Breaking Down Assets

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Time
EMERGENCE
FRENZY
SYNERGY
MATURITY
Big bang Crash Institutional Adjustment Next big bang
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
Bitcoin price
Markets Operate in Cycles
Copyright © 2019 CoinShares Group. All rights reserved.
Apr-13 Apr-15 Apr-17

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$0
$1,000
$2,000
May-97 May-02 May-07 May-12 May-17
BOOKSTORE EVERYTHING STORE COMMERCE ECOSYSTEM
Source: Bloomberg Amazon daily ticker data. Logos sourced from Google images.
Copyright © 2019 CoinShares Group. All rights reserved.
Cyclical v Secular Trends

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BITCOIN ETHEREUM XRP (FKA RIPPLE)
$-
$11
$21
1/1/17 1/1/18 1/1/19
Thousands
$-
$800
$1,600
1/1/17 1/1/18 1/1/19
$-
$1.80
$3.60
1/1/17 1/1/18 1/1/19
As of 7/2019
Up 4780%
As of 7/2019
Up 2488%
As of 7/2019
Up 871%
Cyclical v Secular Trends, Part Two
Source: CoinMetrics.io
The siren song of the secular trend is very seductive, indeed

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US INVESTMENT RETURNS
LAST 5 YRS
CHANGING INVESTOR SENTIMENT
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
• Venture investors increasingly concerned
with valuations, exit environment, and
performance
• Hedge fund performance has been subpar
– in 2017, 43% of funds fell short of
performance expectations
• Exits less frequent – IPO valuation
premium is low, staying private often
better for juicing valuation
• For investors who missed BTC and ETH
1,000x returns, ICO investing looks good
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.”
Placing Crypto in Context

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Source: Global Alternatives Survey, CoinShares estimates.
A New Investing Paradigm
The Internet The Blockchain
Innovation in Information Transfer Innovation in Value Transfer
Application Universe:
Data storage and distribution, streaming video and
music, cloud computing, and information processing
Store of value, smart contracts, asset digitization,
distributed computing, verification, and data management
Capital Deployed from 1995 to 2000 Capital Deployed from 2013 to July 2019
Network:
ISPs Miners, Full Nodes, Staking Pools
Protocols:
TCP/IP, HTTP, DNS, FTP Bitcoin, Ethereum, many others
Capital Deployed from 1995 to 2000 Capital Deployed from 2013 to 2018
$
180
BILLION
= $10B Invest
$
6.2
BILLION
= $10B Invest
<$
1
BILLION
= $10B Invest
$
30
BILLION
= $10B Invest

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Where Value Capture Will Happen
Phase 1 Phase 2 Phase 3: Manage & Use Phase 4
CREATE DISTRIBUTE RETIRE
SPECIALIZATION
APPLICAITON INVESTING
$212 B
10.5 Years
$33 B
3.9 Years
$5 B
2.0 Years
$2 B
4.9 Years
$25B+
in protocol
investments
SPECULATION SPECIFICATION
Bitcoin
Ethereum
EOS
Stellar
$8 B
5 Years
$10 B
4 Years
$4 B
5 Years
$5 B
2 Years
• Power laws dictate a
few protocols will
capture the most value
• Due to liquid markets,
highly momentum and
news driven
• Market leaders will
emerge by sector
• First crypto “unicorns”
across verticals

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Going Beyond Cryptocurrency
Initial Public
Offering
“Initial Coin
Offerings”
Tokenized
Securities
???
THE EVOLUTION OF CAPITAL FORMATION
Crypto -
currency
COIN

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Debt & Equities
Gold
Oil
Real Estate
Wine
Bitcoin
Digital
Independent
Physical
Dependent
“Tokenized" Debt
Precious Metals
Mutual Funds
Bonds
$80T
$288B
The Digitization of Everything

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DISINTERMEDIATION AND DIGITIZATION
Legacy Asset Market Size Blockchain Asset Expression
Gold $7 trillion Store of Value (SOV) Bitcoin
Oil (Commodities) $1.7 trillion Digital Utility
Ethereum &
“Smart Contracts”
VC $60 billion
New blockchain protocols and
early stage
ICOs
HF / PE growth
investing
$1.2 trillion
Securitizing equity for private
companies
Tokenized
Securities
Real Estate $1.4 trillion
Fractional ownership and
tokenized REITs
Tokenized
Ownership
Liquidity, exchangeability, and efficiency are primary features - can crypto capture that premium?
Psychological Anchoring

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We’re Still at the Early Stages
Speculation Utilization Specification
Create Distribute Manage Retire
t = 0 t = 1 t = 2 t = 3
or Replace
The market needs more robust
infrastructure to manage the
lifecycle of a crypto asset

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But the Financial Industry isn’t Waiting
COMPANY CRYPTO MOVE
Buy and sell bitcoin in $cash app
Bitcoin futures contracts
Bitcoin custody, crypto mining
Subsidiary backed for institutional
trading, custody, and much more
MARKET CAP
$32B
$63B
n/a, $1.4T AUM
$44B

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2013 2018
2014 2015 2016 2017
CRYPTO
LEGACY
Everyone is Building “Infrastructure”

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And Some Are Issuing Their Own “Crypto”
Corporate Coin Type & Peg Description # Users
1 Libra = 1 unit of
stable basket
Details are scarce, but assume in-app
payments are first to be rolled out
2,700M
1 JPMCoin = 1 USD
Internal use only, for now – used to
settle “smart contract” bonds
30,000 middle
market, 1,700
corporate
1 Rakuten Coin =
TBD
The online giant’s $9B loyalty program
will be rolled out on a blockchain
102.6M
1 S Coin = TBD
Will allow for mobile phone payments,
and also allows others to mint their
own tokens
Unknown
1 TON = 1 TON
Telegram’s TON token allows in
application use
250M

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But the Results are Mixed
Source: CNBC Coverage

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Allocation Strategies & Performance
An Emerging Asset Management Landscape

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0
10
20
1/1/17 1/1/18 1/1/19
Bitcoin S&P 500 GLD MSCI EM
Source: Yahoo! Finance
Absolutely Speaking, Bitcoin Outperforms

= Market rate
pure
Performance indexed to 1/1/2017

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The Rise of the “Crypto Fund”
0%
30%
60%
< 10 10 - 50 50 - 100 > 100
AUM, Millions of USD
Source: Blue Sky Capital Management, April 2019 Post titled “Alpha for Beta”

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Where is the Money?
2013 2018
2014 2015 2016 2017
Source: CoinShares research

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Smart Beta Fundamental Venture Opportunistic Quantitative
Strategy
Active
Indexing
Passive
Indexing
Long
Only
Long/
Short
Hybrid
Seed /
Early Stage
Growth Credit
Mining /
Staking
(Network
Dilution)
Direction-
al
Market
Neutral
Long Vol
Fee
2.5 – 3% per
annum
2% management + 20%
performance, but as
high as 4 + 40
2 + 20 2 + 20 or higher 2 + 20 but often higher
Duration
Exchange traded,
or monthly or
quarterly liquidity
12 months minimum, +
side pockets for illiquid
investments
10 year lock up + 1
to 2 year roll
24 to 36 months,
sometimes longer
24 to 36 months,
sometimes longer
Bench
mark?
None
None in most cases –
some use BTC, ETH, or
index
None
None in most cases –
some may use rf
None in most cases – some
use BTC, ETH, or index
Source: Vision Hill Research, Crypto Hedge Fund Benchmark Report
A Variety of Approaches…

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Performance Statistics Crypto Hedge Funds Bitcoin
Mean Annual Return 148% 146%
Vol Annual Return 184% 202%
Sharpe Ratio 0.8 0.7
Min Monthly Return -34% -37%
Max Monthly Return 405% 453%
Skewness 6.06 6.42
Kurtosis 44.1 48.3
Source: Blue Sky Capital Management, April 2019 Post titled “Alpha for Beta”
The Upside Down - is and is

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Q3 ’18 Q4 ‘18 Q1 ‘19
Hedge Funds
No. of Data Points 43 48 60
Aggregate (All) - Average -8.5% -19.0% 7.7%
Aggregate (All) – Median -9.2% -18.8% 6.0%
Sub Strategies
Fundamental – Median -14.5% -25.6% 9.6%
Quantitative – Median 2.5% -2.9% 1.6%
Opportunistic - Median -7.8% -24.6% 3.5%
Smart Beta - Median -9.4% -45.5% 11.5%
Market
Bitcoin -9.9% -43.5% 9.7%
Bitwise 10 Large Cap -2.5% -45.9% 10.6%
Bitwise 20 Mid Cap -12.2% -49.8% 16.1%
Bitwise 70 Small Cap 48.7%
Bitwise 100 Total Cap 11.5%
Bletchley 10 -5.4% -41.6% 4.7%
Bletchley 20 -21.6% -48.2% 40.8%
Bloomberg Galaxy Index n/a -11.1% 8.0%
Alpha Alpha (Hedge Funds vs. Bitcoin) +5.6% -12.6% -3.7%
Performance is Art and Science
Source: Vision Hill Research, Crypto Hedge Fund Benchmark Report

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IDIOSYNCRATIC RISK
”Asset” level risk
SYSTEMIC RISK
“Market” level risk
STRATEGY RISK
”Manager” level risk
• Operating strategy
• Investment strategy
• Financial policies and
practices (i.e. “treasury”
management)
• Dependence on “benevolent
dictator” founders
• Lack of liquidity in most
markets
• Limited selection of assets
(convergence on beta = 1)
• Regulatory changes and tax
reform risks
• Failure of technology
creates “bank runs”
• 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
The most relevant risk today is really strategy or manager risk
Understanding Risk

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$0 $10 $20 $30
Pensions
Family Office
Endowments
Foundations
Crypto Market Cap
Trillions
There is $28 trillion of US institutional capital
searching for an investment thesis and value
It will take (a long) time to flow to bitcoin…
Source: Global Family Office Report, Foundation Center, NCES, Willis Towers Watson.
About Those Herds

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Private
Equity
10%
Hedge Fund
20%
Venture
5%
Real Estate
30%
Equities
20%
Bonds, MM
15%
SAMPLE ALLOCATION STRATEGY
Crypto Asset Example
Exchange Traded
Product (passive beta)
Venture Fund
“Crypto Fund”
Direct Investing
IPOs
Equities
HOW THEY’RE PLAYING CRYPTO
For Now, Play the Old Way

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Buy Side: Build Your Own Book?
Key Function Competence Overview
Capital Raising Fundraising Ability to raise capital for investments from aligned investors
Banking and Custody
Banking Services Strong relationships with transactional banks across multiple regions
Storage and Custody Robust crypto custody opsec and infosec
Risk Management
Trade Execution Relationships with OTC desks and market makers, secondary buyers
Portfolio Management Tracking positions across platforms and assets, potentially liquidity
Re-balancing Programmatic trading, liquidating illiquid assets or investments
Liquidity Management Ensuring positions can be sold over time and managing cash float
Governance Network Participation
Staking, bonding, delegation, and other types of governance activity –
can be performance in-house but more likely outsourced
Financial Planning and
Reporting
Allocation Strategy Quantitative and qualitative analysis of investment opportunities
Performance Reporting Robust performance data and tracking
Cash Management and Budgeting Accounts payable and receivables
Accounting and Tax
Valuation and NAV Marking positions, especially in PoS networks or after forks
AUM Calculation Need to mark position values for fee calculation, must be defensible
Tax and Audit Managing any and all tax and audit liabilities across operating regions
Compliance and Legal
Legal Review Ensuring full rights and covenants exercised, lawsuits where applicable
Filings Regulatory filings and licenses where applicable

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A FUTURE PORTFOLIO SO HOW DO WE MAKE THIS HAPPEN
• Data Driven Research – Publishing rigorous,
data-driven research reports and establishing
frameworks for analysis
• Products – Creating a broader range of products
and services that feel more familiar (ie safe) to
investors, with issuers they trust
• Reporting Standards - Implementing more
robust, descriptive, and specific metrics and
reporting practices
• Regulatory Clarity – Developing a more nuanced
perspective on legality, tax implications, and
liabilities
Private Equity
9%
Hedge Fund
18%
Venture
5%
Crypto Assets
5%
Real Estate
28%
Equities
20%
Bonds, MM
15%
Source: CoinShares research
Exposure without an Intermediary?

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Closing Thoughts
Crypto isn’t Going Anywhere

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Binary, Asymmetric Bet
Source: The Economist

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Debt & Equities
Gold
Oil
Real Estate
Wine
Bitcoin
Digital
Independent
Physical
Dependent
“Tokenized" Debt
Precious Metals
Mutual Funds
Bonds
$80T
$288B
The Digitization of Everything

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Futures, Derivatives, and Synthetics Ahoy!
0
10
20
30
1997 2001 2005 2009 2013 2017
Futures Physical
Gold Trade Volume Growth
(normalized, 1997 = 1)

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Get in Touch
www.coinshares.co.uk
[email protected]

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Evolution or Revolution: Putting Crypto in Context

Evolution or Revolution: Putting Crypto in Context

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