KR1 plc…The #Crypto #Alpha Bet

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Bitcoin, bleeding edge, blockchain, Cosmos, crypto, DeFi, digital gold, Ethereum, fiat money, Galaxy Digital Holdings, George McDonaugh, KR1, KR1 plc, network effects, Owner-Operator, Peter Thiel, Polkadot, proof of stake, venture capital

My main 2020 investment thesis is the assumption this #pandemic does not herald new & permanent societal change. But it will reinforce & accelerate existing trends, with #cryptocurrency/#blockchain innovation, development & adoption poised to benefit hugely. It’s just three years since my first & last crypto post (& Bitcoin‘s only twelve years old!), but its progress since has been astonishing…

We kicked off with a spectacular crypto-bubble in late-2017, with the launch of Bitcoin futures triggering the devastating early-2018 collapse…which fortunately played out in less than a year. Fidelity, Coinbase & Bakkt launched institutional-grade digital custody platforms & even the OCC confirmed US banks can now offer digital custody services. Crypto exchanges like Binance, BitMex, Coinbase, Huobi & Kraken now boast hundreds of millions/billions of dollars in daily crypto volume. Libra was announced by Facebook. More & more hedge funds are getting involved – Mike Novogratz launched Galaxy Digital, with Paul Tudor Jones & even Stan Druckenmiller buying into Bitcoin as a digital asset/inflation hedge – not to mention, family office/college endowments (are pension funds & sovereign wealth funds next?). Square & PayPal now accept crypto & more payment companies will follow. Proof of stake has emerged as a green alternative to crypto-mining. Grayscale‘s listed crypto funds now boast a $14 billion+ aggregate market cap (alas, most of the US fund industry still awaits SEC crypto approval), while Total Value Locked Up in #DecentralizedFinance is also at a $14B+ all-time high (& doubling every month/two since June!). Stablecoins are also emerging as stable-value/high-volume bridges to the fiat world. We’ve even seen listed companies like MicroStrategy & Square buy Bitcoin as a corporate treasury asset. And Bitcoin’s now only 6% off its all-time high…

The volte-face in attitudes has also been impressive, with the crypto sector recognizing that embracing (& promoting change in) existing financial/regulatory regimes offers a slice of an infinitely larger pie. While regulators are also more open too – though US regulators may remain as schizophrenic & over-reaching as ever – with central banks (like the PBoC, Fed & BoE) now floating (& trialing) digital currency proposals, to co-operate/compete with crypto. As for investors, the Bitcoin survival debate’s dead…it’s been anointed digital gold & nobody could disagree it’s not a contender. While the mantle of blockchain innovation passed to Ethereum (& the imminent Ethereum 2.0), plus the smart-contract projects & infrastructure being built atop it (3,750 DApps & counting, mostly on Ethereum). And #DeFi is shaping up as a killer app for blockchain…to join forces with #fintech & eventually #BigTech to challenge the legacy financial services/payments industry. [Maybe even value investors get this…look at bank valuations!?] Its IPO may be on ice, but Ant Group‘s still a prescient reminder (for the West) of how easily bank-customer relationships & economics can be cannibalized by disruptive technology & business models.

H1-2020 Wexboy Portfolio Performance

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Alphabet, Applegreen, Asia, bubble thesis, coronavirus, COVID, crypto, financial strength, floating world, KR1 plc, owner-operators, portfolio allocation, portfolio performance, property, QEInfinity, Saga Furs

So yeah…quite the bloody year, eh?!

I hope you & yours have kept safe & well during this #COVIDcrisis – even if you’re not exactly sheltering-in-place anymore, I presume you’re still a conscientious mask-wearer (as needed) in public? All else being equal, it’s disappointing the weather (apparently) isn’t a sure-fire virus-killer – remember when we all assumed, at worst, the summer would offer a welcome & effective respite? You know, meeting people, I used to joke investing was simply the ‘job’ I invented to keep me off the mean streets…I never imagined it would literally turn out like this!?

Anyway, let’s survey the carnage…

As usual, my H1-2020 Benchmark Return is a simple average of the four main indices which best represent the majority of my portfolio:

A (13.2)% benchmark loss is grim…though apologies to my puzzled American readers, who are wondering what carnage? [Apparently 100% of US investors now practice 0% global diversification!?]. If you didn’t know better – i.e. had avoided the media’s water-boarding over the last six months – you’d surely think a (4.0)% loss in the S&P was nothing more than some random market oscillation. Nothing to see here…

But in reality, lots of (US) investors now lean into technology stocks…and the Nasdaq didn’t disappoint, delivering a spectacular COVID-driven +12.1% gain! [C’mon, I tweeted ‘Nasdaq 10,000’ enough in the last year!] Of course, there’s a flip-side, with travel & hospitality being the most obvious sectors to experience devastating (& sustained) share price declines. We see a far more realistic ex-technology US performance in the Russell 2000, which recorded a (13.6)% loss in H1.

H1-2019 Wexboy Portfolio Performance

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#GenerationWar, #WallofWorry, Alphabet, benchmarking, bubbles, crypto, Donegal Investment Group, floating world, KR1 plc, negative yields, portfolio performance, quantitative easing, Saga Furs

And once more…into battle!

Before the month is out, it’s time I look back & share a H1 portfolio update. Of course, in the wake of last year’s Q4 carnage, it wasn’t all that surprising to see markets chalking up a near-perfect YTD performance across the board. Equally unsurprising was the US market’s continued leadership…which seems like an inevitability these days, to the chagrin of long-suffering European & value investors. [Um, aren’t they synonymous?!] So here’s the scoreboard – as usual, my H1-2019 Benchmark Return is a simple average of the four main indices which represent the majority of my portfolio:

On average, a 13.4% benchmark gain…led by the S&P with a 17.3% gain (bested by the Nasdaq, which boasted a 20.7% gain). More surprising was the robust performance of the FTSE 100…despite a tsunami of Brexit nonsense, it still managed to deliver a 10.4% gain. [Not an index-related fluke – the more domestic FTSE 250 & the AIM All-Share (despite a glut of profit warnings) clocked up (on average) similar gains of 11.2% & 7.1%, respectively]. As for the ISEQ & Bloomberg Euro 500, they did themselves proud too, recording respective gains of 12.3% & 13.6%.

Overall, this is a reversal of the 13.5% benchmark loss I reported last year. Which, noting the S&P’s consistent out-performance, is an unwelcome reminder European markets are still actually lower/no better off than end-2017 levels! And really, I’m just cherry-picking here – my European benchmarks have pretty much gone nowhere for the last four years. And again, that’s another flattering perspective…believe it or not, Euro indices have mostly traded sideways for close to two decades now! [Read ’em & weep: FTSE 100, ISEQ, STOXX Europe 600]*. Sure, you still earned a dividend yield…but this savages the comforting notion that equities will always make you decent money/are the superior asset class in the medium & long-term. Though maybe, just maybe, there’s a silver lining to that bag you’re holding:

H1-2018 Wexboy Portfolio Performance

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Applegreen, benchmarking, blockchain, Brexit, crypto, cryptocurrencies, Donegal Investment Group, investing, KR1 plc, MAGA, portfolio performance, reality TV star, relative performance, tariffs, Trump, Zamano

Looking back, the first half this year seems kind of inevitable now…

In the wake of last year’s momentum – possibly even euphoria (see my FY-2017 performance review) – H1-2018 was an unwelcome cold shower for investors. But such is how the market gods operate… And in reality, momentum was limited mostly to US investors (in particular, FAANG fans), who enjoyed 19-25%+ returns last year. Spare a thought for (unhedged) European investors: A weak dollar (down 14% vs. the euro) diluted away most of their US stock returns, while locally they earned a fairly pedestrian sub-8% return. So it’s clearly galling for European investors to now see their local markets down year-to-date (vs. a small US gain)…particularly when most of the ‘blame’ (if there is such a thing) for recent market wobbles arguably belongs to America.

But surveying other markets, we’ve seen more savage reversals of fortune elsewhere this year. Emerging & frontier markets investors enjoyed 32%+ returns last year, but were blindsided this year as markets plunged across the board, with negative returns exacerbated by local currency weakness (high current account deficits being targeted in particular). In fact, quite a few individual markets entered bear market territory. And yes, I mean actual 20%+ declines…not the feeble 5-10% ‘bear markets’ the financial media breathlessly reports these days!

Of course, the real disaster bear apocalypse happened in the crypto market – remember this table?

Take a moment & marvel once more…seems like an awful long time ago now, eh?! While Bitcoin peaked mid-December (rather unfortunate for all those kids who persuaded their folks to buy in over Xmas!), Ethereum & the rest of the market’s incredible momentum carried right into the first/second week of January. Since that peak, the entire crypto market has collapsed almost 70%, with its end-June market cap now barely exceeding $250 billion. Clearly, my #CryptoFOMO theory hit a brick wall: Despite noting a possible crypto-wobble (as I published this post mid-Jan), I argued that new money might not be ready to dive into crypto, but last year’s crypto gains would surely inflame & elevate investors’ risk appetite in the equity markets. Obviously, at the time, I didn’t quite envision such a horrific crypto collapse…or the subsequent schadenfreude.

However, I’d still argue there’s a significant asymmetry here, in terms of potential risk/reward: Crypto euphoria could well re-emerge & spill over into equities…but on the other hand (hopefully, I’m not being too blasé here!) the popping of an asset class/bubble that can be measured in the mere hundreds of billions isn’t all that relevant or serious in the global scheme of things.

Cryptocurrencies & Blockchain – Longs, Shorts, or Trading Sardines…

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Bitcoin, blockchain, crypto, cryptocurrencies, dot-com bubble, Ether, Ethereum, ICOs, initial coin offerings, investment companies, trading sardines, venture capital

Over the last few months, I slowly added lines here & there to this post in my head. Well, the original: It soon evolved into a bear of a cryptocurrency & blockchain primer. One which, anticipating an eventual audience, kept dragging me down an endless rabbit-hole of what about & what if questions…

It’s astonishing such a new innovation has attracted so much passion & opinion so fast. [In reality, its key components – cryptography, a distributed ledger (i.e. a peer-to-peer network), digital money – have existed for decades. The genius of Satoshi Nakamoto was applying them in such a radical & elegant new way]. We’re barely outta the gates here, but it seems like everybody’s already adopted a fervent position of advocacy, denial, or just plain old ignorance… Take your pick & damn the facts – close your eyes & you’d swear it’s politics, not technology.

But maybe this is no surprise – after all, we find it harder to talk (rationally) about money, even more than sex!? ‘Cos it’s personal. And emotional…nothing evokes those familiar demons, fear & greed, more easily than money. And that deeply personal relationship’s become even more fraught & anxiety-ridden – particularly in the West, with more to lose – as we live in a post-financial crisis world, with increasingly meagre economic growth prospects, relentlessly climbing public & private debt burdens, ever more polarised voters, and with even the future of work threatened by technology.

And then, Bitcoin: A new paradigm, uber-money, a stateless & entirely digital currency. Which only served to ratchet our fear & greed even higher. Too many struggle with the apparent irrational exuberance, and even more so the sheer intangibility, of cryptocurrencies. Which inevitably invokes a much deeper fear, of the same intangibility inherent in our fiat currencies, our fiscal obeisance to governments who seem dead-set on printing & spending their way into oblivion, the fragility of our financial assets & markets (which now exist only as electronic blips on hackable centralised repositories), and our economic future & security itself. Hence, that recent primal scream of denial:

‘But they’re not real!!!!!’

[Yes, I counted – Howard Marks really did use five exclamation marks.]

But we also flog ourselves into a real frenzy of greed: How did we miss out so completely on Bitcoin’s incredible & stupendous gains over the last few years (even this year!)? We wonder if maybe, just maybe, this is still the beginning…could a cryptocurrency (or two) ultimately scale up to match the gold market, or even a major global currency? [So why didn’t the media swarm Murray Stahl, as they did Marks or Jamie Dimon? Here’s Stahl’s incredibly bullish take. Ironically, he helped inspire Marks’ next letter, a rather grudging & half-hearted mea culpa]. We even speculate whether investing in the blockchain is a chance to go back in time & actually get in on the ground floor of the internet itself?!