I’ve tended to avoid making too many comments on the issue of cryptocurrencies, because frankly I don’t know enough about them. However, I’m not a disbeliever and accept that cryptocurrencies have multiple uses and, despite my reservations, it’s clear that they aren't going away.
We are currently in a crypto winter, but prices haven’t gone to zero – it’s just felt like an especially savage tech sell off. When tech enthusiasm roars back, cryptocurrencies will be back in business.
With that in mind, adventurous investors might want to have a look at the listed cryptocurrency venture capital (VC) funds trading on the Aquis Exchange. Aquis isn’t the London Stock Exchange, but it’s a viable venue for all sorts of esoteric stocks.
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I have invested in KR1 (AQSE: KR1), AQRU (AQSE: AQRU), and NFT Investments (AQSE: NFT). To varying degrees, they all share the same business model and raise capital to invest in other digital assets, decentralised finance startups, or early-stage businesses.
You could lose it all – but the upside could be huge
If, like me, you think there is something to cryptocurrencies and other digital assets, then putting a small amount of money into early stage venture capital funds makes sense. Always assume that you might lose it all if the VC proves to be useless – but the upside might be huge.
KR1, the biggest of the three funds, has had a spectacular roller-coaster ride. Until late 2021, shares traded under 20p but then exploded to 220p before collapsing back down to 25p a few weeks back. In the last few weeks its share price has doubled again.
There’s another reason why I focus on these funds – the relationship between net asset value (NAV), the share price and cash.
The easiest one to explain is NFT Investments, which invests in non-fungible tokens (NFTs) and the wider digital-assets market. I invested at launch in April 2021 and it’s been an absolutely terrible investment, collapsing in value from 5p to just under 1p. It currently trades at a market cap of around £9.7m but in the last set of accounts to 31 December, it had net assets of £34m. A decent chunk of that NAV is in investments which might be worth close to zero, but there was £21.9m in cash. Administrative expenses run at around £1.2m per annum, so there’s a decent chance that by the end of this year, the fund may still be worth less than 50% of its net cash – and some of those investments could actually be worth something.
It’s less clear-cut with AQRU, where the market cap is £13.63m. NAV at the end of October last year was £12.5m, of which around £10m at the group level was in cash and cash equivalents (these may include stablecoins). The administrative cash burn seems to be running at around £1.1m per annum.
KR1 isn’t a cash play as it doesn’t have too much – about £3.5m according to the end-of-December accounts. It might actually need some cash, given its burn rate. But the NAV is £185m versus the current market cap of £104m. Ether and bitcoin have declined by around 43% in value since December 2021, so it is not unreasonable to slash the value of KR1’s NAV by 45%, which would take us to around £101m, roughly where the share price is at the moment.
Cryptocurrency funds are a risky bet on the future
If you think crypto is here to stay and accept that it will be a wildly volatile asset class but that at some stage it will roar back, then KR1, with its mature, diversified portfolio of digital assets will be in demand.
As for NFT Investments, the cynic in me says surely someone will be tempted to buy it for around 2.5p a share, pocket the cash and then sit tight with the portfolio of investments hoping that the tide will turn for digital art and collectibles.
Still, I’d be remiss not to issue any number of stern warnings to any adventurous soul thinking about this niche. Bear in mind liquidity (not likely to be great), wide bid-offer spreads, ultra-low share prices and the rest of the predictable litany of risks involved with investing small-cap digital assets.
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