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Initiating Coverage: Bitcoin Inv Trust at Underperform; Bubble Trouble

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In-depth analysis of the cryptocurrency landscape from an institutional investor perspective

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Initiating Coverage: Bitcoin Inv Trust at Underperform; Bubble Trouble

  1. 1. Equity Research Investment Trusts Initiating Coverage February 09, 2018 Initiating Coverage Ticker Rating Target Price Current Price GBTC UNDERPERFORM $8.35 $13.95 - - - - Initiating Coverage: Bitcoin Inv Trust at Underperform; Bubble Trouble Chris Brendler cbrendler@buckresearch.com 212-682-4938 Investment Opinion: We are initiating coverage of the Bitcoin Investment Trust (GBTC) at Underperform with an $8.35 target price, representing 40% downside from current levels. Our bearish view is based on (1) GTBC's significant premium to underlying NAV which we view as unsustainable as cryptocurrency (CC) speculation cools and additional retail investment options become available, and (2) despite a ~40% crash in Bitcoin prices YTD (and ~55% from peak), we believe the 4Q17 run-up had all the classic signs of an asset bubble that hasn't fully popped. Although we see long-run potential for CCs and very much is unknown at this early stage, we believe Bitcoin today is overvalued in all but the most optimistic scenarios. Please see pages 2-50 of the attached presentation for our full detailed analysis. Valuation: Our $8.35 TP is based on our "fair value" premium and NAV estimate of +10% / $7.59 respectively. Our 10% premium target is based on (1) investor convenience, security and peace of mind that GBTC provides investors vs. investing directly with cryptocurrency exchanges (+10%), (2) annual mgmt fee charged by Greyscale Investments (-2%) and (3) our estimate of typical transaction/funding costs associated with investing in cryptocurrencies directly (+2%). Currently, shares of GBTC trade at $13.95, representing a 70% premium to NAV and a 19% premium to the historical average of 52%. Key Points: GBTC Premium Seems Unsustainable: As the only U.S. exchange-traded Bitcoin-based equity, GBTC shares trade at a big premium to NAV. With Bitcoin's eye-popping gains sparking mass investor interest (and regulatory attention), we expect the investment landscape to grow as it matures. As CC investment options broaden, GBTC's scarcity-based premium should dissipate. Bubble of All Bubbles: Even after the recent sell-off, we still see a classic asset bubble with many unique characteristics (digital, global, mobile, hard to value) that give the Bitcoin bubble staying power. Although the dramatic decline (recently down as much as 75% from Dec highs) has spooked many retail investors, we still see conditions ripe for inflated valuations and recommend hedged positions. Regulation Expanding: Until recently, CC regulation has been sporadic and largely accommodating, but the 4Q bubble and related explosion of initial coin offerings (ICOs) has catalyzed government reaction. The crackdown has been in China, where new rules have effectively banned CC's with an unclear impact on the market. While regulation from South Korea and the U.S. will likely continue to be gradual, we worry that the most compelling use cases (government avoidance) inevitably invite stricter controls even in the U.S. Usage Drives Value: While CCs are notoriously hard to value (no earnings, cash flow), we believe long-term value creation is driven by fundamental use cases. Today, we believe most transaction volume is speculation/investment and real use cases remain unclear. While blockchain technology is revolutionary, CCs don't necessarily have massive value. With Bitcoin in particular, the opposite appears true as inflated transaction costs have undermined payments adoption. Skeptical On Scarcity: Cryptocurrency demand is also being driven by perceived scarcity and FOMO (fear of missing out) with the primary rationale being "got to buy today before they are all gone". We see this view as flawed. Although most coins have issuance caps (21M for Bitcoin), 2017 proved there is no limit to the number of CCs with over 1,500 today and a projected 2,500 by year end 2018. At this early stage, it is nearly impossible to pick winners, but key structural disadvantages, we expect Bitcoin's leadership status to fade. Fascinating Technology, Still Early: Despite our bearish views on GBTC and Bitcoin, we do see long-term potential and believe most institutional investors are too dismissive of cryptoassets (CCs are a misnomer). In our view, initial coin offerings break capital raising barriers and accelerate/democratize innovation. With so much capital and tech talent investing in the sector, we agree there is long- run potential. However, it is exceedingly difficult to pick winners this early especially when current prices already imply pie-in-the-sky adoption curves. Still, we're big fans of "network effects" and recommend paying attention to this fascinating technological innovation. Important disclosure information (relative to FINRA Rule 2241) about The Buckingham Research Group's rating system, risks, potential conflicts of interest and Analyst Certification appears on pages 51 - 52 of this material (or contact your investment representative). This report should be used as only a single factor in making investment decisions.
  2. 2. Chris Brendler cbrendler@buckresearch.com (212) 682-4938 Bitcoin Investment Trust (GBTC) Structurally Overvalued In More Ways Than One Initiating Coverage at UNDERPERFORM Target Price: $8.35 Equity Research | February 2018Financial Technology | Specialty Finance
  3. 3. 3 GBTC | Introduction: Why Bitcoin, Crypto and GBTC?  Why Cryptocurrencies? 1. Revolutionary new technology that has only tapped a fraction of limitless potential (Internet 1.0) 2. Eventual regulation lays foundation for institutional investment opportunities, compelling ideas 3. Extreme volatility as investors rush to find the next Bitcoin but time horizons are long (like biotech) 4. Depth of disclosure: most blockchains are public so tons of data to analyze, trade, and invest on 5. Constant, easy-to-trade news flow with lots of misinformation, exaggerated reports, mispricings 6. Increasingly liquid crypto-exchanges, institutional platforms scaling and asset class developing 7. Hot sector after 4Q run, everyone is interested and no one really knows that much yet  Why GBTC? 1. Only public Bitcoin investment vehicle today, best way to express our crypto-market view 2. Trades enough to provide sufficient liquidity, futures contracts add additional trading opportunities 3. Significant premium to NAV creates compelling short opportunity against Bitcoin & select alt-coins  Cryptocurrencies Research Coverage Opportunity 1. We’re already familiar with Bitcoin, very in tune with the payments implications 2. Recent bubble rekindled investor interest, unique opportunity to add value in relatively new sector 3. Crypto is pure Fin Tech and we want to be early given incredible potential and growing legitimacy Source: Buckingham Research Group
  4. 4. 4 GBTC | Initiating Coverage at UNDERPERFORM Source: Buckingham Research Group, Bloomberg  GBTC Clearly Overvalued: Trading at a +70% Premium To NAV 1. GBTC trades at a significant premium to NAV due to its current status as the only retail BTC play 2. Premium has persisted but should dissipate as additional trusts and ETFs come to market 3. Short interest has increased, expensive to borrow at this point  Futures Provide Institutional Opportunity To Pair Trade GBTC 1. Recently launched CBOE and CME bitcoin futures provide liquid way to create long BTC positions 2. Bitcoin futures also provide less expensive way to hedge long alt-coin positions
  5. 5. 5 GBTC | Target Price $8.35 Based on 10% Premium to NAV  Although we currently view Bitcoin as overvalued, our GBTC target price is premium only  Confident Bitcoin is also overvalued but after the sharp sell-off, not as clear. Hard to value today  Our “fair value” premium estimate of 10% is based on the following: 1. -2% for annual mgmt fee charged by Greyscale Investments on shares of GBTC 2. +2% for transaction/funding costs associated with buying/trading cryptocurrencies elsewhere 3. +10% for investor convenience, security and peace of mind investing in trad’l investment vehicle  GBTC rather unique among closed-end funds, 10% one the highest among other asset classes Source: Buckingham Research Group, AIC, Morningstar, Bloomberg, Greyscale Investments, Blockchain.info Advantages of GBTC vs. BTC GBTC Bitcoin Built-in Securityand Storage Y N Titled Security Y N IRA-Eligible Y N Sponsored by a Trusted Manager Y N Discount / Premium % Sector: 2007 2017 Bitcoin Investment Trust (GBTC) N/A 49.12% Asia Pacific -8.65% -7.96% Europe (Average) -6.94% -4.19% Flexible Investment -5.51% -6.33% Global (Average) -9.08% -3.80% Japan (Average) -8.83% -1.94% North America -9.71% -9.17% Private Equity -6.21% -12.00% Property Direct - Asia Pacific 15.46% -18.42% Property Direct - U.K. -27.20% 1.98% Sector Specialist: Biotech & Healthcare -5.54% 5.96% Sector Specialist: Commodities & Natural Resources -10.28% -13.40% Sector Specialist: Infrastructure 0.52% 11.51% Overall Weighted Average (ex VCTs & GBTC) -9.01% -3.10%
  6. 6. 6 GBTC | Cryptocurrency Market View: BBOAT Source: Buckingham Research Group  Despite +55% correction since the December peak, we’re bearish here: 1. Biggest Bubble Of All Time (BBOAT), Bitcoin still overvalued even after 55% ↓ 2. Accelerating consumer interest and ICO craziness support BBOAT view 3. Regulatory response accelerating around the world, U.S. is coming soon 4. Use cases exaggerated; even Bitcoin has failed in its original payments function 5. Questionable store of value, scarcity fleeting with cryptoasset explosion 6. Initial regulations likely to be reasonable, but next round will be harsher as most compelling use cases for CCs center around government avoidance  Catalysts: 1. Regulation coming fast -- China, South Korea, India and possibly the U.S. (slow) 2. Further declines in Bitcoin’s cryptocurrency dominance, down to 40% from 90% 3. Additional fraud, scams, market manipulation accusations and criminal charges
  7. 7. 7 GBTC | Constructive On Select Crypto-ASSETs Long-Term Source: Buckingham Research Group, Company Filings  Crypto-“Currencies” Misnomer; Most Are Crypto-“Assets” – Not Meant To Replace Cash  Even Bitcoin has morphed from an online payment system to the backbone of the crypto world  Most investors very skeptical, retail has driven recent boom and bust, institutions are still bearish  Blockchain-Powered Decentralized Apps; Biggest Technical Innovation Since The Internet 1. Beyond just payments (bitcoin), new cryptocurrencies use blockchain technology to create dapps 2. Decentralized apps (dapps) are game changers, some compelling use cases only possible with CCs 3. Bitcoin’s first-mover advantage, network effects. No longer payments, The Reserve Cryptocurrency 4. Increased legitimacy, Wall Street rushing to the party. New asset class may become self-fulfilling 5. Sustainable Bubble? Global demand and instant 24/7 access has potential to give this bubble legs 6. Significant price correction, GBTC down ~60% since December peak  Valuations Stretched Beyond Best Case Scenarios, We’re Bearish Here But Intrigued 1. BBOAT: compelling evidence of classic asset bubble – even after 55% correction 2. Still waiting consumer adoption, very hard to pick winners today as it is way too early 3. Bitcoin’s unique status as a store of value, but scarcity seems fleeting with so many CCs 4. Regulation is coming; China already moving aggressively, South Korea crack down. U.S. next? 5. Most compelling use case is gov’t avoidance -- regulatory risk will only increase with success
  8. 8. 8 Cryptocurrency Comp Sheet Source: coincap.io LOGO SYMBOL NAME USD Price MKT CAP $M Max Cap $M MAX SUPPLY TYPE BASED ON USE CASE FEATURES Decentralized Exchange BLOCKCHAIN PROOF TYPE BTC BITCOIN $ 7,955.9 134,088 167,074 21,000,000 CURRENCY N.A. Payments First Blockchain technology. Longest chain N.A. YES PoW ETH ETHEREUM $ 791.44 77,164 - N.A. PLATFORM N.A. Computing Smart contracts platform already widely used YES YES PoW XRP RIPPLE $ 0.78 30,255 77,558 38,305,873,865 CURRENCY N.A. Interbank Transfers For bank transfers, not just crypto. Private N.A. YES PoW BCH BITCOIN CASH $ 1,210.79 20,532 25,427 21,000,000,000 CURRENCY N.A. Payments Bitcoin fork with larger block size YES PoW ADA CARDANO $ 0.35 8,981 15,588 45000000000 PLATFORM N.A. Computing Internet of blockchains Yes PoS XLM STELLAR LUMENS $ 0.35 6,542 - 102,999,345,256 CURRENCY N.A. Interbank Transfers Bank transfers like ripple, but decentralized JUST FIAT AND BITCOIN YES PoW / PoS LTC LITECOIN $ 143.67 7,921 12,068 84,000,000 CURRENCY N.A. Payments Segwit activated, 2 min confirms instead of 10 N.A. YES PoW EOS EOS $ 8.19 5,381 8,185 1,000,000,000,000 CURRENCY N.A. Payments New Economy, common currency for a better word N.A. YES PoI MIOTA IOTA $ 1.73 4,822 4,822 2,780,000,000 CURRENCY N.A. Payments High txn/sec for the Internet of Things. Uses tangle, not blockchain N.A. NO TANGLE DASH DASH $ 583.92 4,597 11,036 18,900,000 CURRENCY N.A. Payments Anonymity, privacy N.A. YES PoW / PoS TRX TRON $ 0.04 2,320 - N.A. CURRENCY N.A. Payments Best-In-Class Anonymity N.A. YES PoW ETC ETHEREUM CLASSIC $ 21.00 2,094 - N.A. PLATFORM N.A. Computing ETH fork w/o Foundation governance NO YES PoW
  9. 9. 9 Key Point #1 | Biggest Bubble Of All Time (BBOAT) Source: Buckingham Research Group, Coindesk, Factset, Thomson Reuters  Cryptocurrencies (CCs) may have long-term value but today’s valuations aren’t sustainable  We estimate Bitcoin is still at least 30% overvalued while most other CCs are even worse  Unique factors fueling the biggest bubble in history 1. Global, not just millions but billions of potential participants 2. Adoption accelerated with instant online/mobile access and 24/7 trading around the world • Compared to buying houses with subprime mortgages or overinflated tech stocks, Bitcoin Bubble has exponentially more demand all with the convenience of trading with a mobile app 3. Massive wealth creation (everyday millionaires and even a few billionaires) sparks global fear-of- missing-out (FOMO) 4. Difficult to value this new asset class especially at this early stage when ideas are enough to get funding 5. Mind-boggling complexity driving creative valuation methods that support the bubble 6. Crypto-exchanges and ICOs fuel further speculation and hunt for the next hot CC like EOS (Jun ’17 ICO, up 15x to $5.4B or Cardano (Sept ’17 ICO, up 17x to $9.0B) Bitcoin in 2017: +1,250
  10. 10. 10 Key Point #2 | Signs Of The Bubble; The World Wants In Source: Buckingham Research Group, CB Insights, Google  Accelerating speculative activity sparking increasing trading volumes, account growth  Coinbase now over 15M accounts, more than Charles Schwaab  Binance only founded in July 2017, now the largest crypto-exchange  Company forced to halt new account openings in January, opened 250,000 in one day  36% of South Koreans own Bitcoin, dominating pop culture phenomenon  Wall Street is late to the party, institutional activity sustaining the bubble  CBOE and CME launched Bitcoin futures in December, institutional fuel to the speculative fire 31% 62% 62% 54% 18-29 30-49 50-64 65+ Source: Coin Dance, Google Analytics, Gallup, BRG Traditional Equity Ownership by Age Group Baby Boomers (55-65+), 3.0% Gen X (35- 54), 42.9% Millenials (age 18-34), 54.1% Bitcoin Community Engagement by Age
  11. 11. 11 Key Point #2 | Initial Coin Offering Crypto-Craziness! Source: Buckingham Research Group, CB Insights, cryptoslate  ICOs are an innovative new way to raise capital, low barriers to entry spurring Gold Rush  Speculative demand for new coins has encouraged bad actors, no real plan other than get rich  Tremendous growth -- 50 ICOs in Nov 2017, 42 every day in January, over 1500 now  We estimate 80-90% of ICOs are worthless, yet some trade with $1+B valuations  Compared to traditional VC funding, great deal for the startup  Bad deal for (mostly retail) investors – limited disclosure, no ownership, cash flow, voting rights  SEC is moving quickly to step in on scams, we expect enforcement action to accelerate at CFTC too  Early days, see bright long-term prospects for ICO model but market needs rationality, regulation Source: CB Insights, TokenData $1.0B $1.6B $2.8B $0.1B $0.1B $0.1B $0.2B $0.3B $0.4B 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 Total ICO Funding Total Equity Funding Blockchain Equity Funding Pales in Comparison to ICOs Quarterly Blockchain Equity and ICO Financing Top ICO "Jokes" Dogecoin (DOGE) Compny Desc: "Dogecoin is an open source P2P digital currency, favored by Shiba Inus worldwide." Why A Joke? 1: Founder on the record stating the 'currency' was initially created as a joke. Currency Worth: Total Supply = 113.1B DOGE. Currently at $0.004 (USD); MrktCap of $498.9M (High $1B) Useless Ethereum Token (UET) Compny Desc: Why A Joke? Currency Worth: Total Supply = 3.9B UET. Currently at $0.02 (USD); MrktCap of $100K (High $1M) AAA Coin (AAA) Compny Desc: Currency Worth: Total Supply = 138.6 AAA. Price and Market Cap not available. Source: Buckingham Research Group, dogecoin.com, uetoken.com, aaacoin.us, CryptoSlate "You're going to give some random person on the internet money, and they're going to take it and go buy stuff with it. Probably electronics, to be honest. Maybe even a big-screen television. Seriously, don't buy these tokens." Besides explicitly telling investors UET will have/should have no value, the company's website is a pure play at mocking the current state of the ICO / cryptocurrency market. 2: Blog post, Jan 11th, 2018, Founder notes he is active in the CC space and has holdings in various CC, but less than $50 worth of Dogecoin itself. Excerpt from ICO White Paper, "AAA Coin is a speculative blockchain-based CC altcoin with the short-term goal of making men rich and the long-term goal of making them better.
  12. 12. 12 Key Point #3 | Use Cases Still Elusive, Grossly Exaggerated Source: Buckingham Research Group  Outside of speculation, cryptocurrencies don’t have much appeal  Bitcoin volumes have risen substantially but we still see mostly speculation at this point  We still hear way too much optimism on disrupting fiat currencies or traditional payments -- maybe in 20 yrs  Ethereum use exploding but also fueled by the cryptobubble, ICO Gold Rush  Very hard to separate speculation from usage, but seems to be over 90% speculation for most CCs  Decentralized App’s (Dapps) are a structurally inferior consumer experience by design  With no central trusted third party, there is no one to call or complain too  Not just customer service, dapps are inferior across almost every dimension 1. Speed – even the fastest CCs are limited by speed of light, global interconnected computers 2. Cost – redundant transaction verification in decentralized network not as efficient 3. Features – unlike trad’l apps that are constantly improving, dapps are difficult to update  We question the use cases around many on the top CCs, valuations way too optimistic  We think valuations reflect speculation but also extreme over-optimism about use cases  Ripple has made progress with banks, but we question whether any large financial institution will actually pay for XRP (currently being given away for free by the company)  By comparison, Ripple is a blue chip success story. Most other CCs are solely valued on hope  NEM $4.9B, Tron $2.3B, IOTA $4.8B
  13. 13. 13 Key Point #3 | Bitcoin, The Inferior Payments System Source: Buckingham Research Group, Google Relative to Bitcoin, cards have key advantages: In addition, Bitcoin has several key disadvantages: 1. Widely accepted by merchants both on and offline 1. Merchant acceptance declining with escalating transaction costs 2. Widely carried by U.S. consumers with nearly 80% penetration 2. Over 90% of BTC owners haven't used it to make a purchase 3. Easy to use offline with just a swipe, online but e-wallets easing checkout 3. Pay process is cumbersome, complex, and consumer-initiated “send” 4. No fraud liability, purchase protection, transactions can easily be disputed 4. No purchase protection and transactions are irreversible, no returns 5. Most credit cards offer significant rewards including miles and cash back 5. No rewards and they have to pay a small fee just to buy BTC  Bitcoin has key weaknesses as a payment system especially relative to credit/debit cards  Bitcoin has key structural deficiencies, struggling to improve code; newer CC’s are better, faster, more efficient  As the original CC, Bitcoin has significant weaknesses including speed, efficiency, capacity, privacy, and cost  With so many forks (see glossary on pg 50) and 100s of new CCs improving on the original design, Bitcoin’s lead is at precarious  Software upgrades like Lightening are vital, but miners have incentives to block progress and keep fees high  Processing times have slowed and trans fees have skyrocketed, forcing merchants to stop accepting Bitcoin for payments Fork Bitcoin Bitcoin Cash Bitcoin Gold SEWWIT2X Bitcoin Compare BTC BCH BTG B2X Private BTCP Supply 21M 21M 21M 21M 21M Privacy No No No No ZK-SNARK (Zero Cash) Mining ASIC ASIC GPU ASIC GPU Replay Protection No No Yes No Yes Block Interval 10 Mins 10 Mins 10 Mins 10 Mins 2.5 Mins Block Size 1 MB 8 MB 1MB 2 MB 2 MB Pow Algorithm SHA256 SHA256 GPU SHA256 EQUIHASH Difficult Adjustment 2 Weeks 2 Weeks Every Block 2 Weeks Every Block SEGWIT Yes No Yes Yes Yes When Created 2009 Aug-17 Oct-17 Not Yet 1Q18 Unique Addr Format No No Yes No Yes Bitcoin "Forks" Improve On The Original
  14. 14. 14 Key Point #3 | Little Threat To Our Core Payments Coverage Source: Buckingham Research Group, Blockchain.info  Significant cryptocurrency development is disruptive threat but NOT in payments  V/MA: BTC and other CCs pose little threat to the developed card markets as consumers have been slow to adopt even elegant mobile solutions, like ApplePay. While there is greater potential in less card-centric markets (see Alipay’s success in China), CCs are still an inferior solution for most  PYPL: CCs naturally more of a threat online, but Bitcoin joins a long list of competitors that have failed to derail PayPal’s growing first mover advantage. Bitcoin “took off” in 2017 at the same time PayPal’s growth has accelerated, reflecting different spheres of influence.  WU: Highly exposed given marginally better use case and significant investment in the space (Remitly, Rebit, Bitspark, and dozens more), but we still see little evidence of disruption and expect cash to still dominate the international remittance market. Source: BitPay, Buckingham Research Group - 50 100 150 200 250 Jan-14 Jan-15 Jan-16 Jan-17 Estimated Bitcoin Payments Processby BitPay Estimated Bitcoin Payments Processby BitPay ($M) Transactions (' 000)
  15. 15. 15 Key Point #4 | Questionable Store Of Value, Scarcity Source: Buckingham Research Group, Factset, HowMuch  Bitcoin use case has morphed from payment solution to store of value, digital gold  Since early days, allure of Bitcoin as digital gold has been key part of the consumer adoption story  Bitcoin does have some similarities and key advantages over the traditional store of value. While both are scarce and hard to “mine”, Bitcoin can be digitally transferred and is easily divisible  With payments functionality a clear failure, focus has shifted to store of value, new asset class  Bitcoin the “Gold Standard” today but cryptocurrencies are becoming a commodity  Individual coins have limited supply by design (e.g. Bitcoin capped at 21M coins), but 4Q17 showed there is no limit to the number of CCs, over 1500 and grew 13% in January alone (214 more on tap)
  16. 16. 16 Key Point #4 | Rise of the Alt-Coins; Efficient, Faster, Better Source: Buckingham Research Group, coinmarketcap.com
  17. 17. 17 Key Point #4 | Unregulated Wild West; Market Manipulation Source: Buckingham Research Group, Google, Chainalysis  Bitcoin and CC exchanges are unregulated and remain highly exposed to hackers  Short history of cryptocurrencies includes scores of hacks, another $500+M loss just last month  Rapid rise in value has increased the stakes as North Korea has been blamed for the above hack  Bifinex and Tether market manipulation claims have some validity  Recently presented evidence creates compelling case that Bifinex and its Tether token have been supporting bitcoin’s exuberant rise. Tether prices suggest market is not overly concerned…yet  Bubbles cause bad behavior, expect to see more questionable activity come to light shortly  While ecosystems will evolve/improve, we question whether digital assets will ever be safe Source: 99bitcoins.com, benzinga.com Biggest Cryptocurrency Hacks and Thefts $5.1 in BTC $7.0 in Ether $30.9 in Tether $32.0 in Ether $50.0 in Ether $72.0 in BTC $78.0 in BTC $473.0 in BTC $534.8 in NEM Bitstamp (Jan-2015) CoinDash (Jul-2017) Tether (Nov-2017) Parity (Jul-2017) Decentralized Autonomous Org (Jun-2016) Bitfinex (Aug-2016) NiceHash (Dec-2016) Mt. Gox (Mar-2014) Coincheck (Jan-2018) Exchange Wallet Crypto-Mining Marketplace Cryptocurrency Startup
  18. 18. 18 Key Point #5 | Regulatory Response Accelerating, Globally Source: Buckingham Research Group, CryptoCompare  4Q17 Crypto-bubble has catalyzed gov’t reaction, regulation coming to key markets 1. China methodically banning all CCs, no longer leadership role  Banned banks from interacting with banks in 2016, exchanges in Sep 17, ICOs in Oct 17  Mining ordered to shut down ASAP (used to be 80% of mining globally) and full ban imminent 2. South Korea rushing to curtail rampant speculation  Hot bed of speculation, frenzy. Extremely popular, especially among younger Koreans  Banned anonymous accounts, investigating exchanges, next step unclear but likely tighter Chinese Dominated BTC Trading Before Crackdown3. Trump administration now also paying closer attention  Anti-terror, money laundering concerns accelerating with exploding popularity  SEC hates it, shot down ETFs now coming after ICOs (AriseBank January 29th)  Regulation is inevitable, but we think U.S. approach will continued to be supportive, except for frauds
  19. 19. 19 Key Point #6 | Most Compelling Use Case = Reg Risk Source: Buckingham Research Group  In our research, we find the most compelling DAPP use cases around censorship resistance  Dapps are structurally consumer unfriendly, inefficient, and hard to use  Centralization is usually a good thing (someone to call when there’s a problem)  Decentralized Autonomous Organization (DAOs) take it one step further, no sponsoring entity  No one to sue, prosecute, cease & desist, regulate - DAO CCs nearly impossible to shut down  Dapps and DAOs are difficult to control, create powerful use cases for illegal activities  Bitcoin’s initial adoption was largely driven by illicit activities (Silk Road)  Without speculation/trading, not clear how much is for legitimate activity even today  ICOs already looking to capitalize: file transfer (Filecoin), gambling (FunFair), prediction (Augur)
  20. 20. 20 Key Point #6 | Outside of Trading, Little Legit Use For Bitcoin Source: NY Times, Buckingham Research Group  Data on Bitcoin usage show how little the payments functionality is currently in use  Vast majority of activity is trading, mining, and investing  Illegitimate uses dominate the payments functionality including dark markets (Silk Road reincarnates), scams, and mixing services  Although there are some parallels to the early days of the internet, we continue to see few use cases outside of gov’t avoidance
  21. 21. 21 GBTC | Bearish On Valuation, Not All Cryptoassets  Bitcoin overvalued even after big sell-off but we see long-run potential: 1. Still very early and cryptocurrencies are a revolutionary new technology 2. CC valuations are challenging, unique and underfollowed; wide ranges 3. ICOs are changing capital raising, creating unique investment opportunities 4. Dapps are just scratching the surface today, compelling use cases abound 5. Bitcoin has proved resilient and is becoming trusted as network effects grow 6. Institutional investors coming as Wall Street warms up, just need reg OK 7. Bubble may have already popped with Bitcoin down +55% since Dec peak Source: Buckingham Research Group
  22. 22. 22 Counterpoint #1 | Still Very Early and CC’s Are Revolutionary  BBOAT dramatically increasing investment in the crypto-ecosystem, use cases expanding  So much has changed since our last deep dive in 2014. So much more than just payments  No longer just alt-currencies, entire world of crypto-assets: currencies, tokens, and commodities 1. Cryptocurrency: Primary goal medium of value exchange, run own blockchains 2. Cryptocommodities: Ethereum provides backbone for smart contracts, hosts other dapps 3. Cryptotoken: Tokens are cryptoassets issued on another blockchain, mostly Ethereum  Use case has evolved from just payments to a whole world of new “dapps”  CCs are simply digital assets that enable decentralized applications or dapps  Dapps enable everyday processes (payments, computing, storage) without trusted central party  Bitcoin is a payment dapp, Ethereum is a cloud computing dapp, Filecoin is a dapp for storage  Best example of how CC space has changed is Ethereum (ETH)  Only launched in 2015, crowdfunded with Bitcoin and project led by Vitalek Buterin 19 years old  Ethereum is a decentralized world computer to facilitate DAPPs development  Despite severe hacking in 2016, EHT now scaling rapidly with over 500 CCs using it  Current valuations reflect rising speculation, but also probability weighted outcomes  Like biotech on steroids, some of these platforms will scale and create tremendous value like BTC Source: Buckingham Research Group
  23. 23. 23 Counterpoint #2 | ICOs Change Capital Raising, Silicon Valley  ICOs are revolutionary advancement  Decentralize capital raising, anyone in the world with an idea can raise money by selling tokens  Several ICOs have already become huge successes: Ethereum, Cardano, EOS, and Binance  Vastly superior experience for the entrepreneur over traditional VC investing  Don’t have to provide detailed financials, do background checks/audits or give up any equity  Much quicker to market, ICO-funded startups better able to capitalize on market opportunities  Decentralization could be the future of technology  FANGs dominate the Internet today, 10% of U.S. stock market, big share of the digital economy  Smart new innovators with killer apps can just be acquired. Instagram/Facebook, PayPal/Venmo  DAPPs can't be bought, even Google can't buy Bitcoin or Ethereum  U.S. regulatory response will be critical in determining future path  SEC already hates ICOs, now moving aggressively to stop a fraudulent offering, seized cryptoassets  What will be gov’t reaction to retail investors losing money  We see an industry in its infancy, but decentralization is all about market forces, and investors will start to be more discriminating even without regulation and demand more disclosure Source: Buckingham Research Group
  24. 24. 24 ICO Market Map Source: CB Insights
  25. 25. 25 Counterpoint #3 | Dapps Just Scratching The Surface Source: Buckingham Research Group  Blockchain and CC’s are amazing innovation, power to decentralize huge potential  Power to the people, most important technological advance since the Internet  Decentralize everything, democratizing innovation and advancement  Speculation driving most usage today, dapps have slow adoption curves  Decentralized applications are a worse user experience, so not surprising that consumer adoption (outside of speculation) has been dominated by desire to circumvent the law: Silk Road, China.  But unstoppable software that has the ability to send value, execute contracts, share files, etc.  Doesn't appeal to most consumers, especially in the U.S., where there are few legitimate use cases  Coinbase now has 15M accounts (more than Schwab), mostly for investing/speculation  Initial use cases center around censorship resistance  Dapps are inferior consumer experiences, but for some populations are the only solution  Bitcoin started as cash alternative for illicit activity (Silk Road) then as way to avoid capital controls  Successful alt-CCs often have use cases built on government avoidance 1. Filecoin – the Napster that can’t be shutdown 2. Augur – the Intrade that can’t be shutdown 3. PokerCoin – the PartyPoker that can’t be shutdown 4. Monero – the Bitcoin that can’t be tracked
  26. 26. 26 C-point #3 | Bitcoin No Longer CC of Choice For Illegal Activity Source: Chainalysis, Buckingham Research Group  Contrary to popular belief, Bitcoin usage for illegal activity has fallen dramatically. Why? 1. Bitcoin is only pseudoanonymous and government entities have improved tracking capabilities 2. Several alternative CCs that offer better anonymity have gained traction including monero, Verge 3. Government crackdowns on illegal marketplaces (Silk Road 2.0) further reduced Bitcoin dark usage  We expect Bitcoin usage for illegal activity to decline further, improving legitimacy but also undermining it’s most compelling use case to date. Can it hold reserve CC status?
  27. 27. 27 Counterpoint #4 | Network Valuation Complex, Unclear Source: Buckingham Research Group, coinmetrics.io, CryptoCompare, Factset  CCs have no cash flow, earnings, or equity ownership, but there is still value to a network  Token demand amid limited supply does create value, grows exponentially with “network effects”  Metcalfe’s Law: value of a network is proportional to the number of users squared  Shown effective in valuing Facebook and Tencent (view here)  Popular Shortcut: NTV ratio which attempts to be a PE ratio for cryptocurrencies  Network value to transaction value makes sense but seems iterative, we see better approaches  We look at CC valuation based on address growth, transaction count, and mining revenue *BTC/ETH - Current MrktCap as of 2/8/2018; **FB/TWTR/SNAP - 1Q18E Revenue and Users $5.87 $2.85 $5.18 $1.75 $1.27 BTC ETH FB TWTR SNAP Market Cap Per Wallet/Address vs. Avg RevenuePer User Market Cap Per Wallet/Address Average Revenue Per User
  28. 28. 28 Counterpoint #4 | CC Valuation Framework Source: Buckingham Research Group, coinmetrics.io, CryptoCompare  Our proprietary valuation methodology looks at a combination of key inputs:  Users: unique addresses and wallets as proxies for accounts  Usage: transaction count, transaction volume, transactions per user  Revenue: Miner revenue from new blocks and transaction fees  Our multivariate regression analysis has extremely high correlation (91%) but not perfect  Some key inputs are iterative, for example volume and revenue rise and fall with coin prices
  29. 29. 29 Counterpoint #5 | Bitcoin’s Not Dead Yet, Big Network Effects Source: Buckingham Research Group, Company Filings, Factset  Bitcoin facing lots of competition but first-mover advantage persisting  Bitcoin demonstrating staying power, still dominating despite significant flaws, relative weaknesses  Speculation still primary culprit today, but Bitcoin is becoming real store of value in some countries  Crypto-exchanges mostly use Bitcoin as base currency, has become the USD of the crypto-world  Unlike traditional assets, CCs can adapt and change fundamental aspects of the protocol  Bitcoin may not be great today, but CC’s can adapt on the fly  Soft forks update core software and are 100% backward and forward compatible  Hard forks are backward compatible, but not forward so CC splits into two distinct assets  First successful hard fork in Aug 2017 (Bitcoin Cash) led to 18 more, expected to triple in 2018  Payments coverage has repeatedly taught us to never underestimate Network Effects  Two-sided markets where both sides need buy-in are hard to disrupt even with better solutions  PayPal is a great example: Google, Apple, V/MA can’t gain traction in online wallet space  Bitcoin may not be ideal, but status as THE Cryptocurrency may persist with increased adoption  Broadening scale/acceptance creates usage and trust  Already seems to be functioning as the “Bitcoin Standard” of the cryptoworld
  30. 30. 30 Despite Consumer Unfriendly Dapp and Rising Trans Fees… As of YE2013 – 1,812 venues accepted BTC Payments Source: coinmap.org
  31. 31. 31 …Bitcoin Acceptance At Physical POS Still Growing Rapidly As of Feb, 2018 – 11,802 venues accepted BTC Payments Source: coinmap.org
  32. 32. 32 Counterpoint #6 | Wall Street Declaring New Asset Class Source: Buckingham Research Group, Factset, HowMuch  Speculation Shifting Towards Investment  Incredible 1700% returns in 2017 fueling accelerating investor interest  After years of resistance, big investment banks are activity considering building trading desks  CBOE/CME futures add significant legitimacy, ETFs could be next  Senate hearing supportive while promising harsh penalties for fraud/scams, could add legitimacy  Asset class argument adds tantalizing upside  Correlations are small and often, negative adding to investment case  At $10K per coin, market cap of BTC is just 2% of gold; 1% global allocation would put BTC at $40K  Asset class argument could be self-fulfilling – potential to create years of (artificial?) demand All Money = money in any form including bank or other deposits as well as notes and coins. Physical Money = money in forms that can be used as a medium of exchange, generally notes, coins, and certain balances held by banks. Total value of Gold trades at ~60x the value of Bitcoin
  33. 33. 33 Counterpoint #7 | BBOAT Already Popped, Down 55% Source: Buckingham Research Group, onchainfx  Cryptocurrencies have already sold off hard since Dec 17 peak  Bitcoin down about ~55% from Dec peak, average small cap ($1M-$500M) down 69%  “Frothiness” also falling but still elevated  Bitcoin wallet, address, volume growth has slowed recently  ICO creation still ripping, over 300 new coins on the “ICO Calendar” (View Here)  Cryptocurrency trading volumes remain elevated but well off December peaks  Internet and housing bubbles had much shorter wait time for the “reality check,” we won’t know if this was a bubble or buying opportunity for years Name Price USD Mrkt Cap $B Age % down ATH Bitcoin (BTC) 8,125.9$ 137.0$ 9.1yrs 60% Ethereum (ETH) 808.3 78.8 2.5yrs 44% Ripple (XRP) 0.8 30.8 4.1yrs 79% Stellar Lumens (XLM) 0.4 6.7 3.5yrs 61% Bitcoin Cash (BCH) 1,237.7 21.0 0.5yr 71% Cardano (ADA) 0.4 9.2 0.4yr 73% Litecoin (LTC) 148.0 8.2 6.3yrs 61% EOS (EOS) 8.4 5.5 0.6yr 55% NEO (NEO) 113.2 7.4 1.6yrs 42% Dash (DASH) 598.5 4.7 4.1yrs 64% ZCash (ZEC) 415.5 1.3 1.3yrs 56% Lisk (LSK) 23.8 2.8 1.7yrs 39% Monero (XMR) 244.3 3.8 3.8yrs 51% Ethereum Classic (ETC) 22.7 2.3 1.6yrs 53% Iota (IOT) 1.8 4.9 1.6yrs 69%
  34. 34. 34 GBTC | Appendix Source: Buckingham Research Group, Bloomberg Appendix Contents 1. BTC Correlation to Cryptocurrencies pg 35 2. Growth of the Cryptocurrency Market pg 36 3. Cryptocurrency Stats and Charts pg 37-45 4. Blockchain Market Map pg 46 5. GBTC – Financials pg 47 6. Cryptocurrency Glossary pg 48-50
  35. 35. 35 Bitcoin Moderately Correlated With Cryptoassets  Correlations not as high as we would have expected, but high enough  Bitcoin has become the Dollar Standard of the cryptoasset world, most exchanges use BTC as base trading currency  Bitcoin’s unique status as a Store of Value sometimes makes it a crypto-“safe haven” in risk-off markets  Still can be effective way to hedge longs, as such we think correlations increase from here Source: Buckingham Research Group, sifrdata.com
  36. 36. 36 Growth of the Cryptocurrency Market Top 25 Cryptocurrencies by Market Cap (1/3/2016) Top 25 Cryptocurrencies by Market Cap (1/1/2017) Top 25 Cryptocurrencies by Market Cap (2/8/2018) Rank Name Mrkt Cap ($M) % of Mrkt Cap Rank Name Mrkt Cap ($M) % of Mrkt Cap Rank Name Mrkt Cap ($M) % of Mrkt Cap 1 Bitcoin 6,488.0$ 91.48% 1 Bitcoin 15,482.1$ 87.47% 1 Bitcoin 134,543.8$ 35.2% 2 Ripple 203.0 2.86% 2 Ethereum 722.8 4.08% 2 Ethereum 77,445.1 20.3% 3 Litecoin 153.2 2.16% 3 Ripple 237.6 1.34% 3 Ripple 30,263.6 7.9% 4 Ethereum 72.4 1.02% 4 Litecoin 214.7 1.21% 4 Bitcoin Cash 20,663.8 5.4% 5 Dash 19.8 0.28% 5 Monero 185.6 1.05% 5 Cardano 9,035.0 2.4% 6 Dogecoin 15.1 0.21% 6 Ethereum Classic 127.1 0.72% 6 Litecoin 7,952.9 2.1% 7 Peercoin 9.8 0.14% 7 Dash 78.7 0.44% 7 NEO 7,108.8 1.9% 8 BitShares 8.7 0.12% 8 MaidSafeCoin 44.9 0.25% 8 Stellar 6,602.1 1.7% 9 Stellar Lumens 8.4 0.12% 9 Augur 41.7 0.24% 9 EOS 5,407.0 1.4% 10 Nxt 7.3 0.10% 10 Steem 39.1 0.22% 10 IOTA 4,822.4 1.3% 11 MaidSafeCoin 6.6 0.09% 11 NEM 33.0 0.19% 11 NEM 4,736.2 1.2% 12 Factom 5.7 0.08% 12 Iconomi 27.2 0.15% 12 Dash 4,617.1 1.2% 13 Namecoin 5.6 0.08% 13 Factom 26.0 0.15% 13 Monero 3,734.9 1.0% 14 Bytecoin 5.5 0.08% 14 Waves 24.4 0.14% 14 Lisk 2,637.0 0.7% 15 Monero 5.5 0.08% 15 Dogecoin 24.2 0.14% 15 TRON 2,337.0 0.6% 16 GridCoin 3.3 0.05% 16 DigixDAO 17.8 0.10% 16 Tether 2,231.0 0.6% 17 NuShares 3.1 0.04% 17 Stellar Lumens 17.1 0.10% 17 Ethereum Classic 2,112.6 0.6% 18 Emercoin 2.9 0.04% 18 Zcash 16.7 0.09% 18 Qtum 1,957.3 0.5% 19 Rubycoin 2.8 0.04% 19 Lisk 15.2 0.09% 19 VeChain 1,920.4 0.5% 20 BlackCoin 2.0 0.03% 20 E-Dinar Coin 13.2 0.07% 20 Bitcoin Gold 1,690.0 0.4% 21 Clams 1.9 0.03% 21 GameCredits 12.3 0.07% 21 ICON 1,591.8 0.4% 22 YbCoin 1.9 0.03% 22 BitShares 10.1 0.06% 22 Nano 1,443.9 0.4% 23 MonaCoin 1.7 0.02% 23 Ardor 10.1 0.06% 23 Zcash 1,365.6 0.4% 24 Synereo 1.5 0.02% 24 Swiscoin 10.0 0.06% 24 OmiseGo 1,192.7 0.3% 25 NEM 1.5 0.02% 25 Tether 10.0 0.06% 25 Populous 1,185.5 0.3% Top 10 Market Cap 6,985.6$ 98.49% Top 10 Market Cap 17,174.3$ 97.03% Top 10 Market Cap 303,844.6$ 79.5% Top 25 Market Cap 7,037.1$ 99.22% Top 25 Market Cap 17,441.6$ 98.54% Top 25 Market Cap 338,597.7$ 88.5% Total Crypto Market Cap 7,092.6$ 100.00% Total Crypto Market Cap 17,700.3$ 100.00% Total Crypto Market Cap 382,412.8$ 100.0% Source: coinmarketcap.com, Buckingham Research Group Source: coinmarketcap.com, Buckingham Research Group Source: coinmarketcap.com, Buckingham Research Group Market Cap calculated on circulating supply Market Cap calculated on circulating supply Data as of 2/8/2018 551 total cryptocurrencies listed 617 total cryptocurrencies listed Market Cap calculated on circulating supply 1,512 total cryptocurrencies listed
  37. 37. 37 BTC - Currency Statistics Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The total number of bitcoins that have already been mined; in other words, the current supply of bitcoins on the network. The total USD value of bitcoin supply in circulation, as calculated by the daily average market price across major exchanges. Average USD market price across major bitcoin exchanges. The total USD value of trading volume on major bitcoin exchanges. 15.6 15.8 16.0 16.2 16.4 16.6 16.8 17.0 Millions Bitcoins inCirculaiton $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 BTC - Market Price (USD) $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 BTC - Market Cap ($B) $0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 USD Exchange Trade Volume ($B)
  38. 38. 38 ETH - Currency Statistics Source: etherscan.io, Buckingham Research Group Source: etherscan.io, Buckingham Research Group Source: etherscan.io, Buckingham Research Group Source: coinmetrics.io, Buckingham Research Group 82 84 86 88 90 92 94 96 98 100 Millions ETH in Circulation $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 ETH - Market Price (USD) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 ETH - Market Cap ($B) $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 Thousands USD Exchange Trade Volume ($B)
  39. 39. 39 BTC - Block Details Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The total size of all block headers and transactions. The average block size in MB. The total number of blocks mined but ultimately not attached to the main Bitcoin blockchain. The average number of transactions per block. 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 Blockchain Size (MB) 0.60 0.70 0.80 0.90 1.00 1.10 1.20 Average Block Size (MB) - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 Orphanced Blocks - 500 1,000 1,500 2,000 2,500 3,000 Transactions per Block
  40. 40. 40 BTC - Block Details Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Percentage of the last 200 blocks that signal support for Bitcoin Unlimited Percentage of blocks signalling for the New York Agreement over the last 200 blocks The median time for a transaction to be accepted into a mined block. % of the last 2016 blocks that signal support for the activation of the SegWit soft-fork. 0 5 10 15 20 25 30 MedianTransaction ConfirmationTime (withfee) - Minutes Minutes 0% 20% 40% 60% 80% 100% 120% SegWithAdoption(%) 0% 10% 20% 30% 40% 50% 60% Percentage of blocksignalingBitcoin Unlimitedsupport 0% 20% 40% 60% 80% 100% 120% NewYork Agreementsupport
  41. 41. 41 BTC - Mining Information Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The estimated number of tera hashes per second the Bitcoin network is performing. A relative measure of how difficult it is to find a new block. The difficulty is adjusted periodically as a function of how much hashing power has been deployed by the network of miners. An estimation of hashrate distribution amongst the largest mining pools Total value of coinbase block rewards and transaction fees paid to miners. 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Millions Hash Rate (TH/s) HashRate(TH/s) BTC.com, 26.4% AntPool, 18.2% BTC.TOP, 14.2% SlushPool,8.1% ViaBTC, 11.5% F2Pool,5.4% Hashrate Distribution (24 Hours) - 500 1,000 1,500 2,000 2,500 3,000 3,500 Billions Difficulty $0 $10 $20 $30 $40 $50 $60 Millions MiningRevenue (USD)
  42. 42. 42 BTC - Mining Information Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The total value of all transaction fees paid to miners. The total value of all transaction fees paid to miners (not including the coinbase value of block rewards). A chart showing miners revenue as percentage of the transaction volume. A chart showing miners revenue divided by the number of transactions. 0 200 400 600 800 1,000 1,200 1,400 Total Transaction Fees(BTC) $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 Millions Total Transaction Fees(USD) 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% Cost % of Transaction Volume $0 $20 $40 $60 $80 $100 $120 $140 $160 Cost per Transaction (USD)
  43. 43. 43 BTC - Network Activity Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Total number of transactions. The number of Bitcoin transactions added to the mempool per second. The total number of unique addresses used on the Bitcoin blockchain. The number of daily confirmed Bitcoin transactions. 0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Unique Addresses 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Total Number of Transactions Per Day 0 50 100 150 200 250 300 350 Millions Total Number of Transactions - 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Transaction Rate (persecond) TransactionPerSecond
  44. 44. 44 BTC - Network Activity Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The total number of Bitcoin transactions, excluding the 100 most popular addresses. The number of transactions waiting to be confirmed. The rate at which the mempool is growing per second. The aggregate size of transactions waiting to be confirmed. 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Mempool Transaction Count 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Mempool Size Growth(Bytes PerSecond) BytesPerSecond 0 20 40 60 80 100 120 140 160 Millions Mempool Size (Bytes) Bytes 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 Transaction Volume excludingPopularAddresses
  45. 45. 45 BTC - Network Activity Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group Source: blockchain.info, Buckingham Research Group The total estimated value of transactions on the Bitcoin blockchain. The estimated transaction value in USD value. The total number of Bitcoin transactions per day excluding long transaction chains. The total value of all transaction outputs per day. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 Millions Estimated USD Transaction Value 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 Transaction Volume excludingLongChains 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 Millions Total Output Value (BTC) 0 100,000 200,000 300,000 400,000 500,000 600,000 Estimated Transaction Value (BTC)
  46. 46. 46 Blockchain Market Map Source: CB Insights
  47. 47. 47 Bitcoin Investment Trust (GBTC) - Financial Statements Bitcoin Investment Trust (GBTC) (Amounts in $ '000, except per share data) YE2015 1Q16 2Q16 3Q16 4Q16 YE2016 1Q17 2Q17 3Q17 4Q17 YE2017 Statements of Operations Investment Income -$ -$ -$ -$ -$ -$ -$ -$ -$ Expenses: Management fees 741.6 292.3 384.9 514.3 627.1 1,818.7 891.3 1,653.3 3,031.6 Net investment loss (741.6)$ (292.3)$ (384.9)$ (514.3)$ (627.1)$ (1,818.7)$ (891.3)$ (1,653.3)$ (3,031.6)$ -$ -$ Net realized gain/(loss) on investment in bitcoin (414.4) (9.6) 62.6 96.2 280.1 429.3 493.6 1,039.4 2,840.9 Net change in unrealized appreciation on bitcoin cash - - - - - - - - 77,152.2 Net change in unrealized appreciation on investment in bitcoin 16,175.5 (2,155.0) 37,028.7 (9,836.3) 61,516.5 86,553.9 20,537.3 244,825.8 314,139.5 Net realized and unrealized gain on investment in bitcoin and bitcoin cash: 15,761.0 (2,164.6) 37,091.3 (9,740.0) 61,796.6 86,983.2 21,030.8 245,865.2 394,132.6 - - Net increase in net assets resulting from operations 15,019.5$ (2,457.0)$ 36,706.4$ (10,254.3)$ 61,169.5$ 85,164.6$ 20,139.6$ 244,211.9$ 391,101.0$ -$ -$ Statements of Changes in Net Assets Increase/Decrease in net assets from operations: Net investment loss (741.6) (292.3) (384.9) (514.3) (627.1) (1,818.7) (891.3) (1,653.3) (3,031.6) Net realized gain/(loss) on investment in bitcoin (414.4) (9.6) 62.6 96.2 280.1 429.3 493.6 1,039.4 2,840.9 Net change in unrealized appreciation on bitcoin cash - - - - - - - 77,152.2 Net change in unrealized appreciation on investment in bitcoin 16,175.5 (2,155.0) 37,028.7 (9,836.3) 61,516.5 86,553.9 20,537.3 244,825.8 314,139.5 Net increase in net assets resulting from operations 15,019.5$ (2,457.0)$ 36,706.4$ (10,254.3)$ 61,169.5$ 85,164.6$ 20,139.6$ 244,211.9$ 391,101.0$ -$ -$ Increase in net assets from capital share transactions: Shares issued 3,123.5 2,008.1 10,230.2 5,467.8 2,437.4 20,143.5 2,540.9 - - Shares redeemed - - - - - - - - - Net increase in net assets resulting from capital share transactions 3,123.5$ 2,008.1$ 10,230.2$ 5,467.8$ 2,437.4$ 20,143.5$ 2,540.9$ -$ -$ -$ -$ Net increase in net assets from operations and capital share transactions 18,142.9$ (448.8)$ 46,936.5$ (4,786.5)$ 63,606.9$ 105,308.1$ 22,680.4$ 244,211.9$ 391,101.0$ -$ -$ Net assets: Beginning of year 42,795.9 60,938.8 60,490.0 107,426.5 102,640.0 60,938.8 166,246.9 188,927.3 433,139.3 End of year 60,938.8$ 60,490.0$ 107,426.5$ 102,640.0$ 166,246.9$ 166,246.9$ 188,927.3$ 433,139.3$ 824,240.3$ -$ -$ Change in shares outstanding Shares outstanding at beginning of year 1,382.4 1,476.5 1,527.6 1,709.9 1,802.6 1,476.5 1,837.3 1,868.7 1,868.7 Shares issued 94.1 51.1 182.3 92.7 34.7 360.8 31.4 - - Shares redeemed - - - - - - - - - Net increase in shares 94.1 51.1 182.3 92.7 34.7 360.8 31.4 - - - - Shares outstanding at end of year 1,476.5 1,527.6 1,709.9 1,802.6 1,837.3 1,837.3 1,868.7 1,868.7 1,868.7 - - Net asset value (NAV) 41.27$ 39.60$ 62.83$ 56.94$ 90.48$ 90.48$ 101.10$ 231.79$ 441.08$
  48. 48. 48 Cryptocurrency/Blockchain Glossary 51% Attack: When more than half of the computing power of a cryptocurrency network is controlled by a single entity or group, this entity or group may issue conflicting transactions to harm the network, should they have the malicious intent to do so. Address: Cryptocurrency addresses are used to send or receive transactions on the network. An address usually presents itself as a string of alphanumeric characters. ASIC: Short form for ‘Application Specific Integrated Circuit’. Often compared to GPUs, ASICs are specially made for mining and may offer significant power savings. Bitcoin: Bitcoin is the first decentralized, open source cryptocurrency that runs on a global peer to peer network, without the need for middlemen and a centralized issuer. Block: Blocks are packages of data that carry permanently recorded data on the blockchain network. Blockchain: A blockchain is a shared ledger where transactions are permanently recorded by appending blocks. The blockchain serves as a historical record of all transactions that ever occurred, from the genesis block to the latest block, hence the name blockchain. Block Height: The number of blocks connected on the blockchain. Block Reward: A form of incentive for the miner who successfully calculated the hash in a block during mining. Verification of transactions on the blockchain generates new coins in the process, and the miner is rewarded a portion of those. Central Ledger: A ledger maintained by a central agency. Confirmation: The successful act of hashing a transaction and adding it to the blockchain. Consensus: Consensus is achieved when all participants of the network agree on the validity of the transactions, ensuring that the ledgers are exact copies of each other. Cryptocurrency: Also known as tokens, cryptocurrencies are representations of digital assets. Cryptographic Hash Function: Cryptographic hashes produce a fixed-size and unique hash value from variable-size transaction input. The SHA-256 computational algorithm is an example of a cryptographic hash. Dapp: A decentralized application (Dapp) is an application that is open source, operates autonomously, has its data stored on a blockchain, incentivized in the form of cryptographic tokens and operates on a protocol that shows proof of value. DAO: Decentralized Autonomous Organizations can be thought of as corporations that run without any human intervention and surrender all forms of control to an incorruptible set of business rules. Distributed Ledger: Distributed ledgers are ledgers in which data is stored across a network of decentralized nodes. A distributed ledger does not have to have its own currency and may be permissioned and private. Source: blockgeeks.com
  49. 49. 49 Cryptocurrency/Blockchain Glossary Source: blockgeeks.com Distributed Network: A type of network where processing power and data are spread over the nodes rather than having a centralized data center. Difficulty: This refers to how easily a data block of transaction information can be mined successfully. Digital Signature: A digital code generated by public key encryption that is attached to an electronically transmitted document to verify its contents and the sender’s identity. Double Spending: Double spending occurs when a sum of money is spent more than once. Ethereum: Ethereum is a blockchain-based decentralized platform for apps that run smart contracts, and is aimed at solving issues associated with censorship, fraud and third party interference. EVM: The Ethereum Virtual Machine (EVM) is a Turing complete virtual machine that allows anyone to execute arbitrary EVM Byte Code. Every Ethereum node runs on the EVM to maintain consensus across the blockchain. Fork: Forks create an alternate version of the blockchain, leaving two blockchains to run simultaneously on different parts of the network. Genesis Block: The first or first few blocks of a blockchain. Hard Fork: A type of fork that renders previously invalid transactions valid, and vice versa. This type of fork requires all nodes and users to upgrade to the latest version of the protocol software. Hash: The act of performing a hash function on the output data. This is used for confirming coin transactions. Hash Rate: Measurement of performance for the mining rig is expressed in hashes per second. Hybrid PoS/PoW: A hybrid PoS/PoW allows for both Proof of Stake and Proof of Work as consensus distribution algorithms on the network. In this method, a balance between miners and voters (holders) may be achieved, creating a system of community-based governance by both insiders (holders) and outsiders (miners). Mining: Mining is the act of validating blockchain transactions. The necessity of validation warrants an incentive for the miners, usually in the form of coins. In this cryptocurrency boom, mining can be a lucrative business when done properly. By choosing the most efficient and suitable hardware and mining target, mining can produce a stable form of passive income. Multi-Signature: Multi-signature addresses provide an added layer of security by requiring more than one key to authorize a transaction. Node: A copy of the ledger operated by a participant of the blockchain network. Oracles: Oracles work as a bridge between the real world and the blockchain by providing data to the smart contracts.
  50. 50. 50 Cryptocurrency/Blockchain Glossary Source: blockgeeks.com Peer to Peer: Peer to Peer (P2P) refers to the decentralized interactions between two parties or more in a highly-interconnected network. Participants of a P2P network deal directly with each other through a single mediation point. Public Address: A public address is the cryptographic hash of a public key. They act as email addresses that can be published anywhere, unlike private keys. Private Key: A private key is a string of data that allows you to access the tokens in a specific wallet. They act as passwords that are kept hidden from anyone but the owner of the address. Proof of Stake: A consensus distribution algorithm that rewards earnings based on the number of coins you own or hold. The more you invest in the coin, the more you gain by mining with this protocol. Proof of Work: A consensus distribution algorithm that requires an active role in mining data blocks, often consuming resources, such as electricity. The more ‘work’ you do or the more computational power you provide, the more coins you are rewarded with. Scrypt: Scrypt is a type of cryptographic algorithm and is used by Litecoin. Compared to SHA256, this is quicker as it does not use up as much processing time. SHA-256: SHA-256 is a cryptographic algorithm used by cryptocurrencies such as Bitcoin. However, it uses a lot of computing power and processing time, forcing miners to form mining pools to capture gains. Smart Contracts: Smart contracts encode business rules in a programmable language onto the blockchain and are enforced by the participants of the network. Soft Fork: A soft fork differs from a hard fork in that only previously valid transactions are made invalid. Since old nodes recognize the new blocks as valid, a soft fork is essentially backward-compatible. This type of fork requires most miners upgrading in order to enforce, while a hard fork requires all nodes to agree on the new version. Solidity: Solidity is Ethereum’s programming language for developing smart contracts. Transaction Block: A collection of transactions gathered into a block that can then be hashed and added to the blockchain. Transaction Fee: All cryptocurrency transactions involve a small transaction fee. These transaction fees add up to account for the block reward that a miner receives when he successfully processes a block. Turing Complete: Turing complete refers to the ability of a machine to perform calculations that any other programmable computer is capable of. An example of this is the Ethereum Virtual Machine (EVM). Wallet: A file that houses private keys. It usually contains a software client which allows access to view and create transactions on a specific blockchain that the wallet is designed for.
  51. 51. IMPORTANT DISCLOSURES ANALYST CERTIFICATION: I, Chris Brendler, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject companies and their securities. I also certify that I have not been, do not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendations in this report. Distribution of Ratings* RATINGS of Stocks Under Coverage at The Buckingham Research Group Investment Banking Serv./Past 12 Mos. Rating Count Percent Count Percent BUY[B] 100 50.00 0 0.00 NEUTRAL[N] 91 45.50 1 1.10 UNDERPERFORM[U] 9 4.50 0 0.00 NOT RATED[NR] 0 0.00 0 0.00 The Buckingham Research Group’s rating categories are as follows: BUY -- We expect 15% or more total return over the next 6-12 months. NEUTRAL -- The stock's current price reflects our intermediate-term price objectives, and positions may be reduced. UNDERPERFORM -- There appears to be more risk than reward in this stock at current levels. We expect the stock to underperform over the next 6-12 months. NOT RATED -- We are not carrying a rating on this stock for the time being. Rating & estimates under review. *For purposes of FINRA ratings disclosure requirements, our stock ratings of "Buy," "Neutral" and "Underperform" most closely correspond to "Buy," "Hold" and "Sell," respectively, although the meanings of our stock ratings are as set forth above. Note that The Buckingham Research Group moved to a 3 tiered ratings system effective 1/4/10 by combining the prior STRONG BUY and ACCUMULATE ratings into a single BUY rating. Prior to 1/4/10 our historic ratings remain in place. Statement of Risk: Risks associated with attaining the target set for this stock include, but are not limited to, traditional economic and competitive pressures, effective execution of corporate strategies and stock market volatility. Additionally, the company may be subject to government regulation as well as corporate litigation, patent litigation and expirations. Compensation: Analyst's compensation is based upon activities and services intended to benefit the clients of The Buckingham Research Group and (“the Firm”). Like all Firm employees, analysts receive performance-based compensation that is impacted by the individual analyst’s contribution and overall Firm profitability, which includes revenues from institutional equities sales. The analysts may also have funds managed by an affiliate and provide research to this unit consistent with their recommendations to other clients. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Financials Page 51 of 52 February 9, 2018
  52. 52. This report is based upon information available to the public. No representation is made that it is accurate or complete. The Buckingham Research Group and its affiliates may have positions in, and may effect transactions in securities of the companies mentioned herein independently of and not necessarily in accordance with the recommendation. The disclosures contained in this report are accurate as of the date of this report. For additional information regarding the securities described herein please contact your sales representative or our compliance department at (212) 922-5500. © The Buckingham Research Group Incorporated (2018). All rights reserved. No part of this publication may be redistributed, retransmitted or disclosed in any manner without the prior written consent of Buckingham Research Group Incorporated. Financials Page 52 of 52 February 9, 2018
  53. 53. CEO & DIRECTOR OF RESEARCH ASSISTANT DIRECTOR OF RESEARCH HEAD OF INSTITUTIONAL TRADING CO-HEAD OF INSTITUTIONAL SALES CO-HEAD OF INSTITUTIONAL SALES HEAD OF CAPITAL MARKETS Joseph C. Amaturo, CFA Alanna M. Crank Nilsa Vazquez Christopher Cattani Richard Brady Jeffrey Posner 212.922.1815 212.922.2028 212.922.5543 212.922.0453 212.922.5513 212.922.5523 jamaturo@buckresearch.com acrank@buckresearch.com nvazquez@buckresearch.com ccattani@buckresearch.com rbrady@buckresearch.com jposner@buckresearch.com RESEARCH TEAM 750 Third Avenue 6th Floor New York, NY 10017 --- 101 Federal Street Suite 1900 Boston, MA 02110 --- 7760 France Ave. South, Suite 1100 Minneapolis, MN 55435 --- 24600 Center Ridge Road King James 3; Suite 260 Westlake, OH 44145 Main 212.922.5500 | Fax 212.922.5537 INSTITUTIONAL TRADING New York: 212.922.5543 Nilsa Vazquez nvazquez@buckresearch.com John DeMartini jdemartini@buckresearch.com Christopher Kern ckern@buckresearch.com Kevin Platt kplatt@buckresearch.com CONSUMER Apparel Manufacturers & Retailers Eric Tracy 212.210.0066 etracy@buckresearch.com Dave Delahunt 212.922.2020 ddelahunt@buckresearch.com Footwear, Apparel & Accessories Scott Krasik, CFA 212.557.5019 skrasik@buckresearch.com Matt Gulmi 212.210.0081 mgulmi@buckresearch.com Specialty Retail Kelly Crago, CFA 212.557.5197 kcrago@buckresearch.com John Steger, CFA 212.922.2033 jsteger@buckresearch.com Food & Food Services Eric J. Larson, CFA 212.210.0067 elarson@buckresearch.com Steven Haynes 212.922.2023 shaynes@buckresearch.com Richard Brady 212.922.5513 rbrady@buckresearch.com Christopher Cattani 212.922.0453 ccattani@buckresearch.com Jeff Easter 212.682.2940 jeaster@buckresearch.com Andrew Ferremi 212.210.0087 aferremi@buckresearch.com Brandon Heller 212.922.2004 bheller@buckresearch.com Marc Luchansky 212.922.5512 mluchansky@buckresearch.com Francis McCartan 212.922.2042 fmccartan@buckresearch.com INSTITUTIONAL SALES Sasha Murray 212.922.2008 smurray@buckresearch.com Kyle Norton 617.830.7992 knorton@buckresearch.com Conor O’Brien 617.830.2123 cobrien@buckresearch.com Sandy Park 415.549.4951 sandy@buckresearch.com Greg Pringle 617.830.2121 gpringle@buckresearch.com Douglas Rogers 212.922.5762 drogers@buckresearch.com OFFICE LOCATIONS CORPORATE ACCESS Sasha Murray 212.922.2008 smurray@buckresearch.com INDUSTRIALS, MATERIALS & TRANSPORTATION Aerospace & Defense Richard Safran 212.922.5527 rsafran@buckresearch.com Airlines / Cruiselines Daniel McKenzie, CFA 212.922.5531 dmckenzie@buckresearch.com Scott Park 212.922.2026 spark@buckresearch.com Automotive Joseph C. Amaturo, CFA 212.922.1815 jamaturo@buckresearch.com Glenn E. Chin, CPA 212.210.0080 gchin@buckresearch.com Alanna Crank 212.922.2028 acrank@buckresearch.com Chris Armes 212.922.25521 carmes@buckresearch.com Paper & Forest Products / Homebuilding Mark Weintraub, CFA 212.922.2029 mweintraub@buckresearch.com Brendan Munson 212.922.2030 bmunson@buckresearch.com Transportation & Logistics Matt Brooklier 212.557.6850 mbrooklier@buckresearch.com Matt Volpe 212.922.2031 mvolpe@buckresearch.com Machinery Neil Frohnapple 212.922.2058 nfrohnapple@buckresearch.com Joe Nolan 212.682.3318 jnolan@buckresearch.com FINANCIALS Banks & Brokers James Mitchell 212.922.5534 jmitchell@buckresearch.com Chris Walsh 212.922.2019 cwalsh@buckresearch.com Property and Casualty Insurance Amit Kumar 212.922.2047 akumar@buckresearch.com Michael Stanczyc 212.922.2048 mstanczyc@buckresearch.com Payments Chris Brendler 212.682.4938 cbrendlar@buckresearch.com Michael Peirce 212.922.2050 mpeirce@buckresearch.com CAPITAL MARKETS Jeffrey Posner 212.922.5523 jposner@buckresearch.com Gane Duggan 212.922.2039 gduggan@buckresearch.com TECHNOLOGY Technology, Media & Telecom Matthew Harrigan 212.922.2051 mharrigan@buckresearch.com Video Games and Consumer Internet Scott Krasik, CFA 212.557.5019 skrasik@buckresearch.com Matt Gulmi 212.210.0081 mgulmi@buckresearch.com Financial Technology Chris Brendler 212.682.4938 cbrendlar@buckresearch.com Michael Peirce 212.922.2050 mpeirce@buckresearch.com

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