Alster Research Analysis of coinIX

Good Perspectives for 2023, BUY!

Hamburg, 10 August 2023 - For crypto and blockchain companies, the year 2022 was characterized by difficult economic conditions, a loss of investor confidence and a massive drop in the value of many cryptocurrencies. coinIX came through the crypto winter with minor bruises: declining revenues and depreciation led to an after-tax loss of EUR 1.3m. The company has used the market crisis to calibrate its strategy towards technical solutions and blockchain infrastructure, while setting the stage to become an Ethereum validatorand generate staking revenue. The strong recovery in crypto markets since the beginning of the year has been positively reflected in coinIX’s intrinsic value, but not yet in its share price. Based on an updated valuation, we recommend buying the stock with a price target of EUR 2.53 and more than 100% upside.

coinIX has published its financial statements for the financial year 2022. The collapse of one of the largest stablecoins (Terra/ Luna/UST) and the insolvencies of several important market participants (e.g. FTXCelsius Network, Voyager Digital, Three Arrows Capital Pte Ltd) led to a loss of investor confidence and a massive drop in the value of many cryptocurrencies in 2022. The investment activity of Venture Capitalists in the blockchain segment declined significantly, especially in the second half of the year. Even coinIX could not completely escape this market environment but came through the crypto winter comparatively smoothly.

coinIX invests in young blockchain companies from the pre-seed stage until the last financing round before Series A via various instruments (equity, tokens, convertible bonds). Early-stage investments are associated with increased risk, but also open up higher return potential if successful. Due to the lower of cost or market principle, German GAAP (HGB) accounting only reflects the risks in the form of write-downs for lower fair values, while successful investments are not written up (hidden reserves are then only disclosed upon exit). In FY22, coinIX wrote down a total of EUR 667 thousand on portfolio companies whose development did not meet expectations and for some of which there is a risk that the time until cash flow breakeven cannot be bridged by financing. At the same time, some portfolio companies have developed very promisingly and have achieved proof of concept with their business models or have already achieved considerable market success. These include, for example, FINEXITY (platform for the tokenization of assets), Blockpit AG (tax software for trading in cryptocurrencies) and Cadeia (Blockchain platform for structuring, issuing and settling complex financial products).

Despite the difficult market environment, coinIX was able to generate a profit from the sale of cryptocurrencies in the amount of EUR 575 thousand in the financial year 2022. However, this is offset by write-downs on liquid cryptocurrencies in current assets amounting to EUR 360 thousand and on cryptocurrencies in non-current assets amounting to EUR 289 thousand, so that the overall contribution to earnings from cryptocurrencies is slightly negative. However, in view of the partly dramatic price losses of many cryptocurrencies in 2022, this seems very moderate: for example, established cryptocurrencies such as Solana FoundationPolkadot or Cardano Foundation recorded losses of between 80% and 90% and many obscure altcoins became practically worthless. Even the leading currencies Bitocin and Ethereum each suffered a loss in value of around two-thirds.

Significantly declining revenues from the sale of tokens and coins and depreciation led to an after-tax loss of EUR 1.3m in FY22 despite significantly reduced management compensation. However, crypto markets have recovered significantly since the beginning of the year. For the three largest positions in coinIX’s portfolio, this means that the price of The Graph (GRT) roughly doubled during FY23, Bitcoin gained over 80% and Ethereum over 50%. So the outlook for FY23 is very good.

Further development of the strategic direction

coinIX has taken advantage of the crypto market crisis in 2022 to evolve its strategy and make the business more robust. Based on the experience gained, there is increased investment in technical solutions for blockchain infrastructure where decentralization is an important aspect. At the same time, blockchain applications for gaming, sports, or Metaverse tend to move out of focus. In addition, by investing in its own hardware, the company has set the stage to act as an Ethereum validator and generate staking revenue. Finally, in response to the increasing uncertainty regarding the regulation of crypto custody providers such as Coinbase and the aforementioned insolvencies, a multi-level self-custody concept was implemented.

Despite the difficult year 2022 and the further development of the strategy, the core theses of the coinIX investment case remain intact. With a share in coinIX, one acquires shares in segments of the blockchain value chain to which investors would otherwise hardly have access. In addition, there are diversification effects due to the high number of investments. The strong network, especially in the DACH region and Israel, could prove to be particularly valuable due to the pioneering regulatory role of the EU.

Valuation with significant upside potential

The recovery of the crypto markets in recent months has not yet been reflected in the valuation of coinIX. We update our fair value calculation with year-end data, current crypto prices, and an additional revaluation of the company’s equity holdings based on recent developments (see following page: positive deviations from book value are marked in green, negative ones in red). This results in a fair value per share of EUR 2.53. Additional upside potential results from further increases in value of the current portfolio as well as from future transactions. We continue to recommend BUY.

The presentation by the Management Board of coinIX in the annual general meeting of 2023 and the general debate highlighted some interesting new prospects for coinIX. The potentials for generating recurring revenues are to be emphasized: Delegating was resumed for the token The Graph (GRT). In this process, tokens are temporarily made available to an indexerand thus indirectly contribute to network security. Currently, a token yield of approx. 8.2% is achievable (source: Staking Rewards), but the yield is volatile. At current prices for GRT and with a start of delegating in May, this results in an annual revenue potential for coinIX of approximately EUR 100k. In addition, coinIX by investing in its own hardware has created the conditions to act as an Ethereum (ETH) validator and generate staking revenues. The current return on investment for this is around 5.7% (source: Staking Rewards) with an annual revenue potential of EUR 90k at current prices. In addition to a stabilization of revenues, the staking activities thus increase the return potential for coinIX from the holdings of GRT and ETH.

About coinIX

coinIX GmbH & Co KGaA, based in Hamburg, is a listed investment company and has been investing in the broad spectrum of blockchain innovation since 2017. This includes the next level of digitalization in traditional industries, as well as new fields such as Decentralized Finance (DeFi)

For this purpose, coinIX invests in equity of start ups, early token projects and liquid cryptocurrencies. It offers a listed share that is traded on the open market of the Düsseldorf Stock Exchange.

(WKN: A2LQ1G | ISIN: DE000A2LQ1G5 | Ticker: XCX)


Disclaimer: The information stated in this article is not financial advice. all the data has been taken from SRH AlsterResearch AG report about coinIX.