Perspectives UPCOMING EVENT

2 NOV 2020 VOLUME 5

TOPICS

JP MORGAN CME DERIVATIVES REGULATION CREDIT MARKETS Perspectives UPCOMING EVENT

From the Chairman’s Desk

As Chairman of CoinShares, Danny Masters draws upon his decades of experience in commodities and finance. Danny launched GABI, the world’s first regulated Bitcoin fund in 2014, through Global Advisors, a commodities focused investment firm which he co-founded in 1999. Danny was Global Head of Energy and Trading at JP Morgan and has traded "more oil contracts than any single person."

BITCOIN BREAKOUT OR BREAKDOWN

As we enter into another bitcoin cycle, it is hard to make My point is the terminal peak price can be much higher bitcoin price projections. There are valuable metrics, than modelled. What is clear from corporate actions that largely around network activity, that can inform price have been well covered, from our institutional client base views, but the conclusions about the data can seem and from the media, is that bitcoin has turned a corner. circular. In regards to any commodity, it is also hard to The flow of funds is clearly positive and this rally is far predict price when the commodity itself is in some form more orderly and deeper than it was in 2017. I see no of transformation. reason we cannot at least challenge the upper end of the historical range, in fact that is likely. What will be far Looking back to the period 2000-2005, we saw more exciting would be a break above that into new institutional adoption of the commodities theme, driven territory, and while not predicting that I would say that by Chinese physical demand, expressed substantially via should it happen we will see a reversal in the decline of the Goldman Sachs Commodity Index. As institutions volatility. bought into commodities all previous valuation metrics were rendered inaccurate. Conventional wisdom at the time was that under no circumstances could oil go above $65 (A mantra from Gary Ross PhD, the Founder of PIRA research and the energy business' lead analyst) since above that price there was abundant energy in the form of new sources like Canadian tar sands. What actually happened was unforeseen and while in theory there were BTU's available, there were bottlenecks in logistics that eventually caused oil to reach $145.

www.coinshares.com JP MORGAN DELVES BACK INTO BITCOIN, OR DOES IT?

JPMorgan's ventures into technology are not new. In 1999 when commodities were at a cycle low, JPMorgan made an attempt, subsequently aborted, to sell its commodities energy business. Rus Newton and I managed that sale while disagreeing with the timing of the plan - which was actually the catalyst for us to go out on our own. JPMorgan's plan at that point was to divert the freed-up resources to a venture called "Lab Morgan" whose plan was to invest in technology that supported bank-like functions as they migrated to the internet. This was largely focused on electronic trading platforms of various kinds.

There were some successes in the Lab Morgan initiative, but more write-offs, particularly during the NASDAQ crash in March 2000. Overall JPMorgan, while being an impressive and systemically important bank, is not an optimal environment for developing technology. When viewed through the lens of crypto assets, in particular what we have seen from the very start with the Satoshi white paper and at many points since, is that the power of crypto resides with the many, globally spread, developers and entrepreneurs who have successfully bootstrapped crypto from zero to a multi billion dollar industry.

There is a reason that many of the successful founders; Arthur and Kathleen Breitman, George Kikvadze, Wences Cesares, Changpeng Zhao (or familiarly, CZ), Vitalik Buterin, Gavin Wood and Jutta Steiner, Nick Szabo and dare I say it, Arthur Hayes, are, in many cases, refugees from the traditional finance world. In my view, these are the kind of names that drive crypto infrastructure and the crypto ecosystem forward, and the traditional finance world has little opportunity to attract this talent back or create it organically. JPMorgan has been serially critical of crypto, the cold words of Jamie Dimon still ring in the ears of many, comments for which JPMorgan will likely never be forgiven among our core community. I, for one, have not forgotten.

From the Trading Desk

LOOKING AT BITCOIN FUTURES

Over the last 2 weeks we have observed a rally fueled by increased interest from corporations and institutions. Two large financial companies took positions in bitcoin, including Square's decision to buy $50mm of BTC with 1% of its treasury assets, and New York’s multi-billion dollar fund Stone Ridge revealing a $115M bitcoin purchase. On the other hand we have seen increased scrutiny from regulators and government authorities, with Okex, the largest Asian exchange, suspending withdrawals transactions.

Last week PayPal announced it would begin supporting cryptocurrencies, allowing any account holder to store, buy, and sell popular cryptocurrencies starting later this year. The announcement makes PayPal the most significant company in the financial tech sector to adopt support for virtual currencies, as covered extensively by our colleague on CNBC. BTC/USD reacted to the news, crossing 12k, and the upward move quickly snowballed higher, pushed by the short squeeze.

Switching to the derivatives markets, BTC Futures front-end basis moved quickly up to the 15% annualised yield range while 3 months rolling basis jumped up to 12% AR, resetting the curve in a solid contango state. We also noticed a clear shift to a positive basis on perpetual futures pushing the funding rates higher.

BTC is now settling into the 12k+ range supported by a boosted market sentiment, although BTC has recently traded with a negative beta to stocks, we only see it as a local decoupling and price could well be due for a consolidation as the US election gets underway, with price moving through an upward channel.

www.coinshares.com OBSERVATIONS ON THE CME BITCOIN MARKET VOLATILITY BACK ON THE RISE?

Open interest in bitcoin derivatives continues to Option open interest has been growing steadily and reach all time highs, as prices continue a sustained accelerated in the past couple of months with the rally. While Deribit continues to lead the derivatives arrival of the CME in the game. market, we continue to see all time highs on open interest (OI) on the CME. Last week, the CME captured Bitcoin Options Open interest 15.8% of the global open interest tally of $5 billion – the second highest contribution among major exchanges.

As a designated market maker (DMM), we have observed Bitcoin interest has increased as we evolved to an adoption phase from a broader portion of investors, and is perceived as an asset with a large growth opportunity.

The CME exchange has always been the preferred place for institutional investors, a view mainly supported by the convenience of offering a regulated Source: skew.com service for derivatives. Over the past 3 months Bitcoin had a historic monthly end in October as it despite an overall growth of volume on CME Open closed above $13,000, the first monthly close above interest, we do not believe this is sufficient evidence that price in almost three years. Bitcoin is up 110% to gain additional long exposure from Institutions. since the beginning of 2020.

The COT (Commitment of Traders) report shows an Volatility spiked last week with the upward price increase of 52M USD for institutional accounts and movement but quickly went back to previous levels, an increased short position of 65M USD for Hedge settling around 50%. The market seems to price a Funds. steady increase in bitcoin price with out of the money calls remaining cheap. Short term risk COT on CME Bitcoin Futures remains high with the looming US election, an agitated stock market, and uncertainty around another round of US stimulus prior to year end.

Bitcoin volatility spikes are usually driven by 2 simultaneous conditions: 1. Crossing a key level 2. Elevated OI on futures

If both conditions are validated only then we can expect liquidation cascade and Vol spike. At the moment, bitcoin is waiting to see what comes next. Source: skew.com

No clear cut conclusion can be drawn from this data alone, as futures are widely used as a hedging tool in combination to other financial products.

However over the past 2 years CME BTC futures OI has increased steadily, reflecting the growing trading demand driving it. This becomes clear when looking at CME LOIH, or entities that hold 25+ BTC, reached a record of 94 on August 18, 2020.

www.coinshares.com Regulators are Talking, but Clarity Still Lacking Townsend Lansing, Head of Product

At CoinShares, we spend a lot of time and energy thinking about regulation, engaging with regulators, and designing products and services that meet the needs of our clients while complying with changing guidance from global regulators who are still trying to decide what to do with this thing called cryptocurrency.

In the second half of the year, the regulatory landscape for digital assets continues to show meaningful progress. The Office of the Comptroller of the Currency’s (OCC) recent decision to allow American banks to hold digital assets for clients and the EU Commission’s publication of a new unified, transparent regulatory regime for digital assets (known as MiCA) across the bloc represent significant steps for institutional adoption.

Not all is rosy, unfortunately.

In the US, the DOJ is beginning to show its regulatory teeth, charging Bitmex founders with a variety of violations of the Bank Secrecy Act. That is coupled with civil CFTC enforcement against Bitmex. Both of these actions send a clear warning to digital asset exchanges about the risks of engaging with US customers.

And of course, in the UK, the regulatory situation continues to deteriorate. The FCA recently announced its ban on the distribution of digital asset derivatives and ETNs to UK retail investors. The ban, based on the FCA’s belief that digital assets have no inherent value and therefore, cannot be valued by retail investors, suggests real regulatory hostility towards the innovative asset class. (Note: see our response to the FCA news here)

In addition, the UK Treasury is consulting on extending the UK financial promotions regime to include most digital assets. CoinShares responded to the consultation, with our primary concerns being: • The proposals fail to create a comprehensive, transparent regulatory regime for digital assets in the UK; • The proposals fail to reconcile the FCA’s hostility towards digital assets as an investment with the requirements of the financial promotions regime. If an entity is making a financial promotion, that promotion must be approved by a regulated entity. How can the regulated entity ensure the promotion is fair, clear and not misleading? What standards will the FCA apply when reviewing that decision? • Depending on the outcome of this Consultation, unregulated firms will continue to be allowed to distribute and market unregulated crypto assets to retail clients as long as an authorized firm approves any financial promotion made in the context of that activity. That same authorised firm could not approve a financial promotion in relation to derivatives and ETNs referencing unregulated crypto assets (even though those instruments are regulated as specified investments and in some cases offer similar or identical exposures) due to the FCA ban. The proposed regulation seems haphazard and piecemeal and does not align with more progressive initiatives, such as MiCA in the European Union.

CoinShares urged the government to adopt a comprehensive and transparent regime, which we believe is essential if the UK wants to attract innovators and entrepreneurs in the digital asset space. Such a regime would have the following objectives: • Consistent and transparent regime for all market participants across the digital asset ecosystem; • Coordination and (to extent possible) convergence with other global regulatory; and • Same consumer protection and market integrity standards as for any other regulated asset or activity. To stay up to date on the latest, please see our website, where we share these thoughts on a regular basis.

www.coinshares.com $20B in Collateral and Counting Meltem Demirors, Chief Strategy Officer

With over $20B of crypto-collateral being used to Our Speakers Represent a Broad Cross-Section generate over $100M of interest on a quarterly basis, credit is one of the most rapidly growing sectors of the maturing crypto finance ecosystem. While companies have historically been limited to raising equity capital, the growth of a robust asset-backed lending market has been a game changer for industry growth, enabling firms to expand their balance sheets with debt. Lastly, in absence of formal rate setting mechanisms, the industry's growing credit ecosystem is instrumental in establishing rates and informing the development of a crypto yield curve, which prices risk and duration. CoinShares is excited to announce our Crypto Credit Summit – a virtual event where startups, corporates, and investors from both traditional and decentralized finance will come together to explore the evolution of credit in the crypto industry. Over the course of three days (Nov. 17-19), we'll host a series of expert discussions on all things crypto credit – beginning with the world of trading, margin, and rates, exploring types of collateral and new blockchain-based credit primitives, and closing with how these innovations enable new types of credit products. While over-collateralized and fully collateralized loans We’ll hear from firms building new investment have taken off in every part of the crypto ecosystem, products and services leveraging these new credit from most regulated to least, from Wall Street to far- markets, and attracting new types of capital to the flung corners of the internet, our winding path has led industry. Discussion topics include the evolution of us back to the sweet, sweet nectar of risk. As crypto credit scoring, evolving beyond FICO, stablecoins, and credit markets continue to grow and mature, so do the delivering yield in a ZIRP environment. methodologies for managing and selling risk in the form of credit scoring, underwriting, and more. We encourage you to sign up to receive the transcripts and videos from the event!

www.coinshares.com ABOUT COINSHARES DISCLAIMERS

At CoinShares, our mission is to expand access The information presented in this presentation has been developed internally to the digital asset ecosystem while serving as and / or obtained from sources believed to be reliable; however, CoinShares does not guarantee the accuracy, adequacy or completeness of such trusted partners for our clients. CoinShares is a information. Predictions, opinions and other information contained in this pioneer in digital asset investing and manages document are subject to change continually and without notice of any kind hundreds of millions in assets on behalf of a and may no longer be true after the date indicated. Any forward-looking global investor base, with offices in Jersey, statements speak only as of the date they are made, and CoinShares assumes no duty to, and does not undertake, to update forward- looking statements. Stockholm, London, and New York. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. MEDIA CONTACT CoinShares, its affiliates, directors, and/or employees may own interests in the companies mentioned in this document. Any mention of a company, product, Jay Morakis or service is not intended to be a recommendation or endorsement by the +1.646.859.5951 CoinShares Group. [email protected] Nothing within this document constitutes (or should be construed as being) investment, legal, tax, or other advice. This document should not be used as the basis for any investment decision(s) which a reader thereof may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances. Past performance is not a reliable indicator of future performance.

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