Overview of USCC - Superstate Crypto Carry Fund

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Disclaimer

The information contained in this analysis is provided for general informational purposes only and is not intended to be, and should not be relied upon as, legal, financial, or professional advice. Steakhouse Financial assumes no liability or responsibility for any errors or omissions in the content of this assessment or for any actions taken based on the information provided herein.

This analysis is based on the information available at the time of its preparation and is subject to change without notice. The assessment is not a guarantee of future performance or results, and past performance is not necessarily indicative of future results.

You should seek professional advice from a qualified attorney or financial advisor before making any decisions or taking any actions based on the information contained in this assessment. Steakhouse Financial disclaims all liability and responsibility for any actions taken or not taken in reliance on the information contained in this analysis.

Executive Summary

Product Name

Superstate Crypto Carry Fund

Issuing Entity

A Separate Series of the Superstate Asset Trust, a Delaware Statutory Trust

Underlying Assets

Crypto assets, futures and forward contracts on crypto assets, and US T-Bills

Tokens

USCC, ERC-20 Tokens on Ethereum

Minimum Investment

$100,000

Permissions

Primary and Secondary trading limited to whitelisted investors passing a KYC/AML onboarding process

Yield Distribution

Yield accrues to Fund NAV, determined as of the close of regular trading (17h ET) on each day that both the New York Stock Exchange and the Federal Reserve Bank of Philadelphia are open

Fees

0.75% of the value of the Fund’s average daily NAV, as well as qualifying Fund Expenses

Investment Program

The Fund’s investment objective is to generate yield from digital asset basis trading, primarily by executing a “cash and carry” trade investing in the differential between the spot and future price of certain digital asset commodities. The Fund will trade only those digital assets for which the U.S. Commodity Futures Trading Commission (“CFTC”) has permitted the trading of an exchange-listed futures contract. The Fund expects to invest substantially all of its net assets in the spot digital asset commodities underlying these futures contracts as well as in futures and derivative products based on, and/or derived from the digital asset commodities. The assets of the Fund will be both exchange-listed and/or traded over-the -counter globally.

Funds not otherwise invested, including reserves for collateral and redemptions, are expected to be held in USD or USD-like products, including stablecoins like USDC and U.S. Treasury securities.

Tokenized Fund Shares

Shares will be issued in uncertificated form recorded either as non-tokenized Book Entry Shares or as Tokenized Shares. Book Entry Share ownership and transfer will be recorded on the books and records of the issuer. Tokenized Share ownership and transfer will be authenticated and recorded as a token, initially, on the Ethereum blockchain. Other open source, public, blockchain-based distributed computing platforms and operating systems featuring smart contract functionality may become available over time.

USCC is offered under the exemption provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D. Shareholders record their position in the NAV either through Book Entry or through holding USCC tokens on an identified crypto address. The Investment Manager retains the discretion to allow or stop the transfer of Book Entry Shares to a third party and similarly relies on allowlists in USCC’s smart contract functionality to restrict the transferability of the Shares to a list of pre-approved Qualified Investors. Consequently, the supply of USCC tokens will always be equivalent to the outstanding Shares of the Fund, outside of positions held on Book Entry.

Crypto Basis Strategy

The Fund primarily invests in crypto basis strategies (differential between the spot and future price). These strategies are executed through holding, at various times, underlying crypto asset collateral, futures or forward contracts on the same assets or US T-Bills.

Income Accrual

Income generated by the Fund will be accumulated and reinvested by the Fund. There are not expected to be any distributions or dividends to the shareholders other than redemptions of Fund Shares.

KYC/AML Compliance and Whitelist

The Fund and USCC tokens are available to "whitelisted" (aka Allowlist) investors who have passed checks for suitability, AML/KYC verification and register their corresponding addresses. Only the whitelisted users can subscribe for or acquire tokens on the secondary market. The Allowlist address check is part of the USCC token’s code and occurs each time a transaction is attempted. If the receiving or sending address is not present on the Allowlist, the transaction will fail.

1. Structural Analysis

The information herein is sourced primarily from the Superstate Crypto Carry Fund Confidential Private Placement Memorandum and supplementary materials. For a complete description of the Fund, including its risks, please refer to the Offering Memorandum and governing documents directly.

1.1. Structure

The Fund

Superstate Crypto Carry Fund (the “Fund”) is a separate series of Superstate Asset Trust, a Delaware statutory trust, organized in series (the “Trust”).

The Investment Manager

Superstate Inc.

Portfolio Managers

Robert Leshner and Jim Hiltner

The Shares

Issued as both non-tokenized Book Entry Shares and Tokenized Share ownership alike

The Shares are offered at an initial offering price of $10.00 per Share, determined arbitrarily by the Investment Manager. Shares have no par value and represent a fractional, undivided beneficial interest in the Fund.

Fees

0.75% of the value of the Fund’s average daily NAV, as well as qualifying Fund Expenses

Minimum Investment

$100,000

Redemption

Shares may generally be redeemed on any Business Day (each, a "Redemption Date")

Compulsory Redemption

The Investment Manager has the right to compulsorily redeem any or all of a Shareholder’s Shares at any time for any reason or for no reason without notice to such Shareholder, at the prevailing NAV as calculated by the NAV calculation agent

Administrator

NAV Fund Services, Inc. has been appointed as administrator, registrar and transfer agent and Net Asset Value calculation agent to the Fund.

Custodian

Anchorage Digital Bank N.A., UMB Bank, N.A.

Auditors

Ernst & Young LLP

1.2. Investment Program

The Fund aims to generate yield by executing a so-called crypto basis strategy. The fundamental idea of the strategy is the persistence of a difference between the spot price of a crypto asset and the forward or futures price. Hence, by purchasing the underlying crypto asset and selling a forward or future, the Fund aims to earn a positive carry.

The fund invests heavily in digital assets that are linked to exchange-listed futures contracts approved by the U.S. Commodity Futures Trading Commission (CFTC). This includes both the underlying spot commodities and related derivatives such as options. Future underlying crypto assets may be added, provided the CFTC approves for trading a futures market for them.

To maintain flexibility, the fund holds unallocated capital in assets such as U.S. dollars, stablecoins like USDC, or U.S. Treasury securities. These reserves support operational needs such as collateral and redemption requirements.

1.4. Income Accrual

Income generated by the Fund will be accumulated and reinvested by the Fund. There is not expected to be any distributions or dividends to the shareholders or token holders.

1.5. Fees

The Superstate Crypto Carry Fund charges an annual management fee of 0.75% of the fund’s average daily NAV, calculated daily and payable monthly in arrears. This fee is waived until the fund’s assets under management exceed $50 million. Beyond the management fee, the fund may incur and pass on additional expenses, including organizational costs, transaction fees, regulatory compliance costs, and other operational expenses. These fees and expenses are detailed in the fund’s agreements and are integral to its operation and management. Shareholders are not subject to any performance-based fees or allocations.

2. Legal Overview

The Superstate Crypto Carry Fund is a separate series of the Superstate Asset Trust, a Delaware statutory trust organized under the Delaware Statutory Trust Act (DSTA). The fund operates pursuant to the Fifth Amended and Restated Declaration of Trust and Trust Agreement, dated July 3, 2024, which serves as its governing document. While the fund is structured to provide investors with exposure to digital assets, it is not registered as an investment company under the U.S. Investment Company Act of 1940. Instead, it relies on an exemption under Section 3(c)(7) of the Act.

Shares in the fund are offered exclusively to qualified purchasers and accredited investors under Regulation D of the U.S. Securities Act of 1933. The fund complies with anti-money laundering (AML), Know Your Customer (KYC), and other regulatory requirements, but it is not subject to ongoing supervision with respect to its investment activities by any governmental authority.

The fund issues two types of shares: Tokenized Shares, which are recorded on public blockchain systems, and Book Entry Shares, maintained solely on the fund’s internal records. Shareholders do not possess voting rights under the governing trust agreement, nor can they access detailed fund books or records beyond what is made available through designated systems.

The fund is subject to restrictions on share transferability, primarily aimed at ensuring compliance with securities laws and its internal policies. Additionally, the Delaware Statutory Trust structure provides legal protections by segregating assets and liabilities across different series within the trust.

‍2.1 Record of Ownership

Shares will be issued in uncertificated form recorded either as non-tokenized Book Entry Shares or as Tokenized Shares. Book Entry Share ownership and transfer will be recorded on the books and records of the issuer. Tokenized Share ownership and transfer will be authenticated and recorded as a token, initially, on the Ethereum blockchain. Other open source, public, blockchain-based distributed computing platforms and operating systems featuring smart contract functionality may become available over time.

USCC is offered under the exemption provided by Section 4(a)(2) of the Securities Act and Rule 506(c) of Regulation D. Shareholders record their position in the NAV either through Book Entry or through holding USCC tokens on an identified crypto address. The Investment Manager retains the discretion to allow or stop the transfer of Book Entry Shares to a third party and similarly relies on allowlists in USCC’s smart contract functionality to restrict the transferability of the Shares to a list of pre-approved Qualified Investors. Consequently, the supply of USCC tokens will always be equivalent to the outstanding Shares of the Fund, outside of positions held on Book Entry.

2.2. Key Parties

2.2.1. The Fund

The Superstate Crypto Carry Fund is a series of the Superstate Asset Trust, structured as a Delaware statutory trust. It is designed to operate as a pooled investment vehicle, allowing qualified investors to gain exposure to digital asset strategies.

2.2.2. The Trust

The Superstate Asset Trust is a Delaware statutory trust that houses multiple investment series, including the Superstate Crypto Carry Fund. Each series operates independently with segregated assets and liabilities, providing investors with a distinct legal and financial framework for their investments. The trust’s structure ensures compliance with the Delaware Statutory Trust Act (DSTA).

Ownership of Shares in one Series are limited to that Series as a separate Series of the Trust and does not constitute ownership of Shares in the Trust or any other Series of the Trust.

2.2.3. The Trustees

The trustees for the Superstate Asset Trust include Delaware Trust Company, serving as the Delaware trustee, and other service providers as outlined in the trust agreement.

2.2.4. Investment Manager

Pursuant to the Investment Management Agreement, Superstate Inc (“Superstate Management”) will act as Investment Manager of the Fund. The Investment Manager has full discretion to invest the Fund’s assets, subject to the Trust’s oversight, in line with the Investment Program outlined above.

Superstate Inc is the Investment Manager of both the Funds held by the Trust, the “Superstate Short Duration US Government Securities Fund” and the “Superstate Crypto Carry Fund”. The Investment Manager may perform business management activities on behalf of the Trust, subject to the discretion of the Trustees.

2.2.4. Calculation Agent

Pursuant to the NAV Calculation Agreement, NAV Fund Services, Inc.has been appointed as the Fund’s NAV Calculation Agent for the Fund. The NAV Calculation Agent's responsibilities include calculating the Fund’s net asset value and providing various accounting, back-office, data processing, and related professional services as outlined in the agreement.

2.2.5. Auditors

Ernst & Young LLP have been appointed as the independent auditors to the Fund on their usual terms and conditions and will charge a customary fee for such services.

2.2.6. Custodians

The Investment Manager may change or add custodians or broker-dealers as deemed in the Fund's best interests. The Investment Manager is authorized to open accounts and establish arrangements with additional custodians and broker-dealers. This allows the Fund to hold securities in its name with relevant market securities depositories on terms determined at the Manager's sole discretion.

Currently, the Fund has a Custody Account with Anchorage Digital Bank N.A. (“Anchorage”) for holding crypto assets and UMB Bank (“UMB”) for holding any fiat in the fund. Furthermore, collateral may be deposited with counterparties as initial margin in the course of establishing forward agreements, in the range of 20-30% of the NAV of each position.

2.4. Redemptions

2.4.1. Regular Redemptions

Shares can generally be redeemed on any Business Day ("Redemption Date", provided the New York Stock Exchange and the Federal Reserve Bank of Philadelphia are open) at the Net Asset Value per Share for that day, minus applicable fees and charges. Redemption requests must be received by 5:00 pm Eastern Time on the Business Day before the Redemption Date. Late requests may be carried forward to the next Redemption Date, and affected Shareholders will be notified.

To redeem Shares, Shareholders must provide the Investment Manager with their method of transmitting redemption requests, authorized individuals for requests, and wire instructions if proceeds are in USD or a digital wallet if proceeds are in USDC.

The Fund may establish reserves, gates, lock-ups, or holdbacks for accrued expenses and contingencies, which could reduce redemption distributions. The Investment Managers can waive notice or fees, permit special redemptions, charge redemption-related costs, and set minimum redemption amounts.

2.4.2. Compulsory Redemptions

The Investment Manager, for example, may compel the redemption of all or some of the Shares of a Shareholder at any time and for any reason or no reason. The Investment Manager may determine in its sole discretion to compel redemption where a Transfer of Shares would, in the Investment Manager’s sole discretion, (a) adversely affect the Fund’s and/or any offer or sale of any Shares’ reliance on an exemption from registration under the Securities Act, (b) adversely affect the Fund’s reliance on the Fund’s exclusion from the status of being an “investment company” within the meaning of the Investment Company Act, or (c) is deemed by the Investment Manager to pose a potential risk, including concerns related to AML, KYC, or other compliance matters, in each case as determined by the Investment Manager in its sole discretion

2.5. Suspension

The Investment Manager has sole discretion to temporarily suspend redemptions and/or payments, whether in part or in full. Such suspension may occur for various reasons, including: (i) situations where conducting redemptions or payments would result in violations of applicable securities or other laws or lead to unfavorable legal and/or tax consequences, (ii) instances where determining the accurate value of specific assets becomes impractical due to factors such as market closures, trading suspensions, or disruptions in valuation methods, (iii) conditions that render it unfeasible for the Fund to realize the value of its assets, (iv) occasions when suspending such transactions is deemed necessary to prevent significant adverse effects on the Fund’s Shareholders in general and (v) when it is necessary for the orderly liquidation of assets to facilitate redemptions and (vi) any other period determined by the Investment Manager.

In the event of an extended suspension of redemptions, Shareholders may only engage in permitted Transfers as the primary means to sell Shares during such times.

‍3. Fund Analysis

3.1. Portfolio Overview

The Superstate Crypto Carry Fund (USCC) employs a market-neutral investment strategy known as the "cash-and-carry" trade, focusing on arbitrage opportunities in the cryptocurrency markets. This approach involves purchasing a cryptocurrency in the spot market while simultaneously selling futures contracts for the same asset, thereby locking in a predictable return as the two positions converge over time. The fund primarily targets Bitcoin and Ether for these trades.

In addition to cash-and-carry trades, USCC enhances its yield through staking Ether. Staking involves participating in the Ethereum network's consensus mechanism, earning rewards in the form of additional Ether. To further optimize returns and manage risk, the fund allocates a portion of its assets to U.S. Treasury securities (specifically allocating to T-Bills when the yield opportunity in basis isn’t sufficiently above the federal funds rate, at the discretion of the portfolio managers). These government-backed instruments provide a stable income stream and partially dampen the inherent volatility of cryptocurrency markets.

The use of staking for ETH is logical from the perspective of capital efficiency. However, the choice of fringe liquid staking tokens with no secondary liquidity introduces significant risks, including but not limited to a) inability to liquidate or exit positions in times of volatility, b) counterparty exposure to a marginal issuer, c) operational exposure to slashing from use of a concentrated node operator set. These risks could be mitigated by not staking ETH at all or selecting alternatives with secondary liquidity. The fund could well do this over time to patch risk shortcomings and continue improving the performance and risk of the strategy.

As of November 14, 2024, the fund's portfolio composition was as follows:

3.2. Analysis of the Superstate Crypto Carry Fund Strategy

The USCC strategy exploits the differences between the price of an asset in the spot market (the current market price) and its future market price (the price at which it is agreed to buy or sell the asset in the future). This price difference is known as the basis.

• When the futures price is higher than the spot price, the basis is positive - this state is known as contango. This often occurs in bullish markets due to high demand for leverage.
• When the futures price is lower than the spot price, the basis is negative - this state is known as backwardation.

The crypto carry strategy aims to lock in the premium between the futures and spot prices during a positive basis (contango). The trade consists of buying the underlying asset in the spot market while simultaneously selling the futures contracts for the same asset. The trade is closed when the futures contracts near expiration, at which point the futures price converges with the spot price. The asset purchased in the spot market will typically be delivered to settle the futures contract. The locked-in difference between the futures price (sell price) and the spot price (buy price) minus transaction and carrying costs (e.g. fees, funding rates, storage) is the profit.

Multiple different instruments can be used to express the short leg of the crypto carry trade. Most popular implementations are using either perpetual futures or exchange-listed forwards.

• Perpetual Futures: These contracts have no expiry date and are designed to track the spot price closely through a funding rate mechanism, which ensures that long and short positions pay or receive periodic fees (e.g. every 8 hours) based on market conditions.

In a positive funding rate environment, long positions pay short positions (indicative of contango). In a negative funding rate environment, short positions pay long positions (indicative of backwardation). The funding rate essentially acts as a cost (or income) that must be accounted for in the trade.

• Forward Agreements: Unlike perpetual futures, forwards have no periodic funding fees. Trade profits/losses are determined solely by the difference between the spot price and the forward price at settlement. This means carrying costs are more predictable and often fixed, as there are no market-floating funding rates. However, forward contracts have fixed expiry dates, making them less flexible as the trades must be rolled over. Furthermore, forwards may be less liquid than perpetual futures, depending on the market and expiration dates.

The comparison between perpetual futures and exchange-listed forwards are summarised in the below table.

The Superstate Crypto Carry Fund Strategy currently solely uses OTC (Over-The-Counter) forward agreements rather than perpetual futures often accessed through crypto-native exchanges to implement the cash-and-carry strategy; however, the fund could invest in perpetual futures as part of the strategy if determined beneficial to investors. The implementation choice is designed to deliver an institutional-quality service by executing trades through top-tier U.S.-based prime brokers and trusted qualified custodians. Further, the use of forwards over perpetual futures reduces the market risk of the trade in the following ways:

• Elimination of funding rate risk: Forwards do not have funding rates, which removes the risk of adverse rate movements eroding profits.
• Reduced liquidation risk: Since forwards contracts settle at expiration, there is no risk of forced liquidation due to margin requirements changing during the trade. With perpetual futures, high volatility can cause margin calls or liquidations if the position is not adequately collateralized.
• Carrying cost predicability: With forward contracts, the cost of the trade is determined at the outset, based on the initial basis (difference between the forward price and the spot price), making it easier to calculate and manage the trade’s profitability. Perpetual futures must contend with fluctuating carrying costs, which in turn depend on funding rates and may require active management to maintain profitability.

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3.3. Capacity Analysis

The capacity of a crypto cash-and-carry strategy for Bitcoin and Ethereum is determined by various factors like market size, competition (more in Section 4) and operational constraints. While it is impossible to be definitive about the strategy’s capacity, the following factors merit consideration.

• Market size is a function of asset coverage and open interest (OI). Currently USCC focuses on crypto commodities, namely BTC and ETH. As additional crypto assets become classified as commodities, the Fund can diversify into new assets and their derivatives (e.g. SOL, AVAX, etc.) which will in turn expand the market size. USCC exclusively uses CFTC-approved venues for implementing the trades, in line with Superstate’s goal to build a regulated asset management business that complies with all US securities laws.

Given the above, perhaps USCC’s capacity today may be best informed by BTC and ETH’s OI on the CME. Historic OI of BTC and ETH Futures contracts have shown structural growth over the years. As of October 2024, combined OI on the CME exceeds $10 billion, with the BTC market size being over 10 times larger than that of ETH. With a $71.5 million AUM, the USCC Fund has a substantial runway for growth within its current strategy and implementation of that strategy. The capacity could increase further with the use of perps.

• Competition: The presence of arbitrageurs can compress the basis, reducing the profitability of the strategy. As more participants engage in basis trading, the spread between spot and futures prices may structurally narrow, limiting capacity.
  
  
• Operational constraints: Exchanges may enforce position limits to maintain market integrity and prevent excessive speculation. For instance, the CME imposes the following aggregate position limits held by a single firm:

Bitcoin (BTC) Futures:

• Spot-Month Position Limit: 4,000 contracts.
• All-Months-Combined Position Limit: 5,000 contracts.

Ether (ETH) Futures:

• Spot-Month Position Limit: 8,000 contracts.
• All-Months-Combined Position Limit: 20,000 contracts.

3.4. Yield Analysis

‍The crypto cash-and-carry strategy has historically shown a huge variation in returns depending on market cycles and venue-specific factors.  During bullish market cycles (e.g. the 2020-2021 rally), demand for leveraged long positions cause futures prices to trade at a significant premium to spot prices, pushing annualized yields into the double digit range. Conversely, during bearish or low-volatility periods (e.g. late 2022), basis spreads compress and yields can drop below 0% to negative.Average perpetual yield data from Ethena Labs, creators of the synthetic dollar USDe built on the cash-and-carry strategy, provides valuable insight into yield variability. In March 2024, market exuberance drove yields above 60% on an open interest-weighted basis. Subsequent bearish sentiment in April briefly turned yields negative, while recent post-election enthusiasm has once again pushed yields back toward 30%.

Carry yields also vary by venue. Empirical research by BIS in 2021 showed historic yield comparisons across regulated venues versus offshore crypto-native CEXs such as Binance and OKX. CME futures have tended to offer narrower but more stable spreads, while crypto-native exchanges provide higher yields driven by volatile funding rates, higher liquidation risk as well as higher counterparty risk.

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4. Competitive landscape

The crypto cash-and-carry strategy has been employed by hedge funds for many years. The trade became more popular when BTC and ETH futures were listed on the CME in December 2017 and February 2021, which provided a way for institutions to express the carry trade through a regulated venue. In late 2023, Ethena introduced USDe, an ERC-20 token which pioneered the tokenization of the cash-and-carry trade. USDe, the delta-neutral “synthetic dollar”, distributes cash-and-carry yields to the staked token holders, and integrates with DeFi on the Ethereum and, more recently, Solana blockchains. Ethena’s USDe was truly innovative because it essentially allows global liquidity to participate in the cash-and-carry trade. With billions of TVL and consequently increasing liquidity, sUSDe also functions as a yield-bearing collateral asset. Since then, several new entrants have emerged, aiming to scale the delta-neutral carry strategy and capture market share. However, Ethena remains the clear leader with over $4bn in TVL at the time of this writing.

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