Crypto Thunderdome: FRMO $FRMO vs KR1 Plc $KROEF $KR1.AQ

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I know that many of my readers are enthusiastic about things like coal and gold, and they might be rightfully skeptical about cryptocurrencies.  I have been slow to come around to crypto myself, despite spending too many years in college studying money, and being surrounded by young crypto enthusiasts as a finance professor.  I remained skeptical.

When I would ask my students at the University, “What is money?” they would typically give me a weak, memorized answer; a medium of exchange, a unit of account, or some other regurgitated response.  But when I would ask them, “What is money in prison?” I would get a lot of enthusiastic young people eager to tell me that the answer is cigarettes.  Which is incorrect, by the way, as American prisons went non-smoking several decades ago. Today many prisoners use pouches of mackerel from the commissary, but that is beside the point.  Everyone immediately understands what it means that cigarettes were money in prison.  It means that if you were in prison, and someone was going to send you a care package, you would ask them to send cigarettes, even if you didn’t smoke.  You would want cigarettes because other people want cigarettes.  And that is the essence of money, the thing people want because other people want it.

That recursive definition, the thing people want because other people want it, creates a powerful feedback loop.  That feedback loop causes money to bet a network good, and in the case of network goods, the market becomes winner-take-all.  Cassettes chased out 8-track tapes just as quickly as streaming chased out mp3 players; music is a network good because artists want their music released on the platform that everyone has a player for, and everyone wants a player for the platform that all the artists are releasing on.  You rarely see side-by-side monies in an economy, the more marketable money is better for transactions, and the inferior money disappears from use.  You do often see a different kind of money for saving, as Gresham’s Law takes hold and the money that holds value better over time isn’t spent in the shops, but rather squirreled away for another day.

Well young people want crypto, and will probably continue to want crypto for many years to come.  Central banks want gold, and probably will continue to want gold for many years to come.  And of course, governments want fiat because they can spend without taxing through inflation.  So now we have three monies side by side, competing for control.  It might take a couple of decades to know which money will win in the end, and in the meantime, there will be massive swings in purchasing power as those feedback loops are powerful forces.  

The gold bugs in the audience can probably recite Aristotle’s qualities of a good money: durability, portability, divisibility, and intrinsic value.  But then again, Aristotle didn’t have a smartphone in his pocket, with access to an exchange 24 hours a day to switch between currencies.  He also wasn’t familiar with a world where those easily convertible tokens could have lottery-ticket characteristics, some rising and falling dramatically in purchasing power.

What is really better, an ounce of gold that in a thousand years can still probably buy you a tailored suit and a pair of shoes?  Or a diversified bundle of lottery tickets, some of which might be able to buy you a Bugatti before you turn 32?  The young people today are choosing the latter.  So isn’t it prudent to allocate a small portion of a portfolio to their money, just in case they have a critical mass for the reinforcing feedback loop to come out in their favor?  I say yes, at this point it is probably imprudent to not have a 1% allocation to crypto in a portfolio.

It just so happens that the timing is probably pretty decent as Gary Gensler has announced that he is likely stepping down from the SEC before Trump fulfills his promise to fire him.  And we are in an interest rate cutting cycle, likely to set off the next series of bubbles.  Remember that the last bubble saw bored ape #3749 sell for $2.9 million.  How high will we soar in this next bubble before the sun melts the wax on our wings?  For me, crypto is not a buy and hold forever investment, but it is probably set up for a very good several year run.

In a previous article, I was very enthusiastic about FRMO (FRMO), an investment company operated by Murray Stahl.  I would like to compare it side-by-side with a different holding company, KR1 Plc (KROEF, KR1.AQ).  

Unlike FRMO, KR1 is an exclusively crypto holding company.  It focuses not on Bitcoin itself, but on other proof of stake coins, which is jargon for saying that they own coins that are capable of being tied up in something like a bank CD for a yield.  The current yield is about 10%, per annum, so even in a down market, this bag of lottery tickets is sloughing off more lottery tickets every year.

I am very far from an expert in crypto, in fact I’ll probably just embarrass myself the more I write about it.  But one nice thing about investing is the ability to outsource competency.  With FRMO you get Murray Stahl managing the portfolio, with KR1, you get George McDonagh.  The nice thing about Murray Stahl is that his expertise in traditional investing is so thorough, one only has to listen to him to recognize his expertise and to be willing to trust his judgement on which alt-coins to choose.  Trusting George McDonagh is more of a leap of faith for a traditional investor, because he is much more entrenched in this new ecosystem than our old one.  

Also, Murray Stahl is incorporated in the United States, where we have the assurance of a reasonably smooth operating legal system that we can somewhat predict.  George McDonagh is based out of the Isle of Man and Gibraltar, jurisdictions known as havens from taxes, rules, whatever.  On the one hand, it is a red flag to operate out of a jurisdiction like those, but on the other hand, with Gary Gensler declaring war on their web3 economy, it’s hard to blame him for avoiding the USA domicile.

So how has George McDonagh done with his choices of alt coins?  KR1’s current largest holding, Celestia (TIA), started out as a $75,000 position, and has since grown to a value of $41 million, about a five hundred bagger.  Of course that comes on top of who knows how many coins which returned to their intrinsic value, zero.  The choice of coins and the constant yield from staking them, has resulted in a return over time, even in a down market for crypto these last few years.  I am reluctant to track net asset value so closely, as the purchasing power of the underlying coins fluctuates so wildly, but the number of coins in KR1 has certainly increased over time.  One can only imagine what the results will be during the next boom, which is highly likely already upon us.

FRMO has other non-crypto investments, so to get a 1% portfolio weight in crypto, it would take a much larger stake in FRMO, which is primarily Texas Pacific Land Corp (TPL).  Also, the bulk of FRMO’s crypto holdings is bitcoin, although they are mining some alt coins currently.  KR1, however, is a pure alt coin portfolio, with no bitcoin, so a 1% allocation to KR1 would have a significant impact on portfolio exposure.

Both FRMO and KR1 are thinly traded, so good luck acquiring much of a position without moving the market.  

Is it better to buy FRMO and let Murray Stahl manage a Litecoin mining operation, or to buy KR1 and let George McDonaugh invest in early stage proof of stake operations?  Even if I were enthusiastic about cryptocurrencies myself, I don’t think I could figure out the answer within a few months.  When in doubt, split the difference; I wouldn’t be against buying a small amount of both.  With cryptocurrencies, a small amount can have a huge effect in a portfolio when things have the capability of being 500 baggers.  

In conclusion, I am not a crypto enthusiast, but I understand the awesome power of self reinforcing feedback loops, and the adoption of a new form of money as a network good is one of those feedback loops. In the same way that you shouldn’t turn your back on the ocean, you shouldn’t be without at least a small amount of crypto.

Maybe I’ll see you at the Bugatti dealership.