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.

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Kryptonite Even Superman Could Love…

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blockchain, city discipline, cryptocurrencies, dot-com bubble, Ethereum, flipping, George McDonaugh, ICOs, KR1, Kryptonite, Kryptonite 1 plc, multi-bagger, token sales, venture capital

As some of you suspected, my last post (& related comments) were intended as an essential intro here, so it’s worth revisiting:

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

[And since I ducked providing some kind of primer, let me highlight the best introductory books I’ve read in the past year: ‘Digital Gold’, ‘The Age of Cryptocurrency’, ‘Blockchain Revolution’, ‘The End of Money’…nor would I under-estimate the ‘For Dummies’ books. And this is new: Hash Power. And finally, here’s an interesting news/research resource.]

After highlighting some of the risks & challenges investors face if they’re considering direct investment in cryptocurrencies & blockchain (via mining, buy & hold investment, initial coin offerings, and/or blockchain VC investment), I concluded the safest & most practical approach for the vast majority of investors was inevitably via:

Listed Investment Companies

But while I detailed metrics for 16 core listed sector plays (& highlighted another 23 potential plays), I offered no recommendations. In fact, in terms of such nascent technology/innovation & the listed sector’s $2.6 billion market cap (just 2% of the $144 billion cryptocurrency market…which is another rounding error globally), I question if valuation’s even a relevant filter at this point. Same for management – many of which don’t necessarily match the typical CEO profile investors expect, or boast a prior/public track record.

[Not suggesting you abandon all (valuation) rationale. Or ignore management: Companies/projects will ultimately live or die by their management & they still need to be evaluated in their current role (at the very least). Focus particularly on what they actually do & achieve, not just what they say…]

In reality, the main challenge (& best framework) now for investors is to develop a real view on the entire sector – long, or short – one strong & personal enough to hopefully steer you towards the best investment opportunities, and help you sleep through the inevitable volatility & reversals to come. Thinking about cryptocurrencies & the blockchain separately is a great place to start, as people still confuse/conflate them*. Ultimately, they’re very different beasts…a negative view of one shouldn’t preclude a positive view of the other.

[*Even crypto-warriors have decided (or at least conceded) they’re trading Ethereum…but they’re actually trading Ether!]

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?!