2 0 S E P T 2 0 2 0 V O L U M E 2

TOPICS

Perspectives

CENTRAL BANK DIGITAL CURRENCIES (CBDCs)

INTEREST RATES

DEXes

CREDIT

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HOW LOW CAN WE GO? ZIRP AND BEYOND...

Across major markets, there seems to be a shift to moredovish monetary and fiscal policy, with rates pushedlower for longer as the US Fed decrees that rate rises arenow on hold through 2023 and there is little prospect ofmeaningful fiscal stimulus before the US Election. Hopesfor reflation are pinned on breakthroughs inimmunization, although Trump is at odds withscientists.

A sustained ZIRP (zero interest rate policy) environmentis bullish for crypto. I reference back to a MervinGoodfriend paper, which I have cited many times. ZIRPcreates problems below zero, and today the Bank ofEngland announced it is floating the idea of negativerates. This speaks to the need for policies to driveforward central bank digital currencies, where ratescould be enforced negative with the associatedelimination of cash. If people can’t extract money inphysical form or use it to buy gold or bitcoin or other safehaven assets. With a CBDC, governments can monitor

and enforce these policies to the detriment of citizenswho look at the prospects of giving the bank $1,000 inorder to get $980 twelve months from now and find itless than appealing.

The push for CBDCs is already happening in somemarket, particularly France, where the French centralbank has announced it is working with Tezos to create aCBDC issued on the network. Given the rapid pace ofChina’s digital currency project and the political chaos inthe United States, the Euro zone is not sleeping on thismatter. After spending several years at the IMF whichwas a very active proponent of digital currencies andtheir use in monetary policy, Christine Lagarde is settlinginto her role as Chair of the ECB quite nicely, and clearlysees a window of opportunity to extend Euro hegemonybeyond the borders of the Schengen zone as theincreased polarization between China and the US leavesopen space for a new global hegemon.

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 Energyand Trading at JP Morgan and has traded "more oil contracts than any single person."

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LET'S TALK ABOUT DEX

It was another wild few weeks out on the frontier, withactivity on decentralized exchanges (DEX) giving largercrypto venues a run for their money. Activity on DEXeshas far exceeded expectations, largely thanks to thetrend of yield farming, or using existing ETH or ethereum-based assets to "earn" new tokens by providing liquidity.The data provider Glassnode reports that over 15% of allETH is locked in smart contracts, up from 11.5% a yearago. At today's price, that equates to $6.5B of ether beingput to work. All of this frenetic activity requires theability to exchange a wide range of assets on a venuewhere anyone can trade anything with anyone withoutrequiring a listing or formal support from the venueitself.

Enter Uniswap, the decentralized trading venue andliquidity aggregator servicing this new world. Looking atthe numbers, Uniswap is bringing the heat!

Trade volume: Volume on Uniswap has been averagingover $500M per day over the past week, and broke $1B in

a single 24-hour period late August when the DeFi tokencraze was at its most frenzied. Compare this totraditional retail venues like Coinbase (avg $450M / day)and Kraken ($150M / day) or trader-first venues likeBitMex ($1.1B / day) and Deribit ($250M / day).*

While this is an apples to oranges comparison, it's aninteresting proof point for how quickly DEX use hasbecome normalized, with retail users and institutionaltraders alike. In a ZIRP environment, asset owners arelooking for yield opportunities, and their risk tolerance israpidly increasing.

Liquidity: The last two months of liquidity data provideevidence to support one of our core investment theses inour venture fund. Blockchain-native asset provide oneimportant feature - fluidity of capital and collateral. Asevidenced by Uniswap's liquidity over the last month,crypto holders and traders alike can and will migrateliquidity when they see an opportunity to leverage theirholdings in a productive manner.

Source: *Volume data sourced from CoinGecko, Sept. 17 2020

"Rampant money

printing is not creating the inflation

needed to stimulate further gains in

inflation-related

trades like bitcoin"

- Danny Masters

ON CRYPTO MARKETS

It’s been rather quiet all things considered, and bitcoin seems to be echoing gold.Rampant money printing is not creating the inflation that would stimulatefurther gains in inflation-related trades i.e. safe haven assets like gold andbitcoin, especially as demand numbers are predicted to be softer than expected.

Long story short - Bitcoin has stayed range bound despite a slew of positive news,largely because there is not enough inflation due to weak aggregate demand.On the current regulatory environment around crypto, the EU seems to be stirring,particularly around stable coins and asset-backed or collateralized coins, with168 page proposed new legislation, though realistically implementation is still 2year away.

On expectations for crypto in Q4 - we are seeing steady accrual by investorsacross all segments, and more significant investor groups are now taking it moreseriously.

From the FrontierMeltem Demirors, Strategy + CoinShares Ventures

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This is evidenced by the early September dip in Uniswapliquidity, when many users migrated their liquidity to acompetitor, SushiSwap, to "farm" SUSHI tokens. Therapid migration of liquidity back to Uniswap has beenthe result of the platform launching its own token, UNI,while SushiSwap has been bogged down by drama andinsider politics, not to mention rapidly declining APYs.

As crypto market infrastructure continues to evolve,traditional trading firms, trading venues, and hedgefunds are taking notice. While the yields on offer aresweet, the opportunity to build better tradinginfrastructure that would support 24/7/365 markets andabstract out major trading venues where liquidity is heldhostage is even sweeter still.

UNISWAP LIQUIDITY Uniswap Volume – No Rest for the Decentralized

Source: Uniswap.exchange, 19 Sep 2020Source: Uniswap.exchange, 19 Sep 2020

CRYPTO “CREDIT”: NEW MODELS FOR RISK

Along with the DEX trend above, crypto credit iswitnessing a Cambrian explosion as new protocols, newmarketplaces, and new companies are buildingfrantically to capture some of the glow of the DeFi trend.To date, the majority of crypto credit markets have beenbased on fully collateralized and over-collateralizedlending, where users who are fundamentally long cryptoassets or cash can use them as collateral to obtainleverage, primarily for trading, or as some like to call it,“going irresponsibly long.” (all credit to our friend RaoulPal for coining this phrase, it’s quite excellent)

The last two decades of FinTech innovation haveintroduced little structural change to credit, but rather,created more streamlined, digital processes andorganized marketplaces where demand and supply areaggregated more efficiently. Innovation has stayedlimited to the “edges.”

Let me explain what I mean. It’s 9 pm on Saturday nightin New York (I know, I’m SO fun!) I want to take out aquick, short-term loan to take advantage of anopportunity. But where do I go? Maybe a FinTech startuplets me fill out and submit a preliminary loanapplication with a little bit of machine learning to speedup the process. If I wait until 9 am Monday morning,maybe my brokerage firm lets me apply to open a margin

account but even when I get approved, I can’t take thatleverage to Binance, or better yet, Uniswap, to buy what Ireally want – some more tokens.

There is no practical way for me to get short-term loan,on my phone, in a few minutes, using my existing assetsas collateral, or even better, using my financial history,financial behavior, and net worth as a guarantee.

Crypto lending, whether via decentralized P2P markets orcentralized lenders, allows abstraction of intermediaries.We. are in the early innings of a massive credit marketwhere collateral is hyperfluid, and with less capture atthe product and platform level because collateral is notconstrained to one venue and switching costs are low.

Lenders, lending platforms, and marketplaces willbecome less relevant over time, given that assets onblockchain networks are easy to migrate acrossplatforms and marketplaces in search of best risk /reward balance.

But we can’t just provide borrowing to people whoalready have crypto to use as collateral. We needundercollateralized lending, which inevitably requiresbetter models for analyzing and managing risk.

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So how do we get to the promised lend? Historically,lenders have relied on credit scores and backward-looking data about a borrower to gauge their riskiness asa borrower. Credit data is BIG business. In the US, the 3primary credit bureaus are all valued at more than $15B,and the largest startup, Credit Karma, at

But we don’t want to recreate the same centralizedsystems of the past with new gatekeepers. In order forthis market to grow, we need to re-think borrower

analytics and credit scoring. There’s been an explosion ofinnovation in risk management and analytics tools.Examples include:

We see the opportunity for new financial datamanagement platforms and networks to be built aroundconnecting borrowers with lenders in new ways. There’s awhole generation of crypto credit SaaS companies justwaiting to emerge! And we intend to find them.

MARKET CAP, $B

Source: Bloomberg, 18 Aug 2020

more than $4B. Creditanalytics is a HOT space, andbanks and startups alike arehungry for as much data aspossible about borrowers inorder to sell a broader range ofhigh margin services.

ABOUT COINSHARES

At CoinShares, our mission is to expandaccess to the digital asset ecosystem whileserving as trusted partners for our clients.CoinShares is a pioneer in digital assetinvesting and manages hundreds of millionsin assets on behalf of a global investor base,with offices in Jersey, Stockholm, London,and New York.

MEDIA CONTACTMegan Carey+1.646.859.5953press@coinshares.com

DISCLAIMERS

The information presented in this presentation has been developed internally and / or obtained from sources believed to be reliable; however, CoinShares does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this document are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking 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. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time.

CoinShares, its affiliates, directors, and/or employees may own interests in the companies mentioned in this document. Any mention of a company, product, or service is not intended to be a recommendation or endorsement by the CoinSharesGroup.

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