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Managing Directors' Report 2022
“The cyclical nature of the digital asset economy is once again fully evident: Throughout the financial year, the crypto ecosystem saw the unravelling of multiple crises, starting with the Luna and Terra implosion earlier in the year, the subsequent blowups of formerly major entities in the space and, ultimately, the demise of FTX and Alameda Research and their affiliated operations. Following the momentous bull market cycle previous to that – 2022 saw investor confidence plummet and an exit of participants and liquidity from the digital asset sector. As market cycle history repeats itself, the previous year and recent partial recovery serves once again as a strong reminder that with such extreme cyclical volatility, complex trading, loans and leverage are a dangerous mix of unnecessary risks when investing in this asset class.
As shown in the Company’s financial statements and despite the turmoils in the crypto ecosystem, especially in the latter part of the financial year, the Company’s Net Asset Value stood at £70,006,184 (2021: £185,030,165) at the year end, which resulted in a Net Asset Value per Ordinary Share of 39.47p (2021: 122.68p) at the year end. While the portfolio suffered from the decrease of crypto assets prices across the board, we are continuing to build a high quality ‘long-only’ portfolio of innovative digital assets. This strategy has allowed the Company to ride out and benefit materially from the market cycles that we have experienced to date. We believe the structure of KR1 as a publicly listed permanent capital vehicle and its approach to investments creates a resilient model which puts the Company in a leading position to take advantage of crypto’s exceptional growth potential going forward.
Throughout the year the Company generated a total Income from Digital Assets of £20,204,355 (2021: £20,959,934) for the financial year. We are particularly pleased with the consistency of this income, which is driven primarily by the Company’s staking activities and the rewards received from participation in parachain auctions. These activities have very efficient underlying economics, especially when compared to the capital-intensive Bitcoin mining businesses.
Since the close of the previous year, following the shock of the FTX panic and its contagion, the crypto ecosystem has found stability, even witnessing some sustained positivity more recently. While encouraging, it is not necessarily indicative of an impending start of the bull market anytime soon with the macro backdrop still threatening valuations of ‘risk assets’. A seemingly overtly hostile regulatory position of the current US administration towards digital assets could also stifle adoption, suppress prices and continue to drive future innovations out of the US, to nations more welcoming of the technology and its potential benefits.
The recent partial US banking crisis reignited interest in Bitcoin’s ‘sound money’ narrative, however, Ethereum looks to potentially capture some of this narrative following its successful upgrade to ‘Proof-of-Stake’ (ETH now being termed ‘ultra sound money’ by respected voices in the Ethereum community). Following the completion of Ethereum’s upgrade, KR1 benefited from the performance of Rocket Pool and Lido, both long-time seed investments since 2017 and 2020 respectively, that relate to Ethereum’s staking ecosystem and were placed firmly front and centre in the minds of the market after the successful move.
In terms of technology, Ethereum remains the platform that sees by far the most activity, currently still best expressed through the blossoming Decentralised Finance (“DeFi”) ecosystem, which will continue to become ever more relevant to crypto’s overall growth. There are also very exciting developments happening within other layer-1 blockchain ecosystems. Cosmos has recently captured attention as ‘interchain security’ shipped, which could benefit the ATOM token economics while placing the Cosmos on a high-growth trajectory for hundreds of new application specific chains to onboard. Likewise, the Polkadot ecosystem continues to develop at a rapid pace, ranking at the top of developer activity charts across the entire crypto landscape.
Throughout the past year and into this year we have continued to see strong inflows of innovative projects seeking investment and have also seen portfolio projects successfully go live and launch their products, such as Vega recently with enabling trading for its alpha mainnet.
We are expecting further projects in the portfolio to come to market over the next time period: A major one being Celestia (formerly LazyLedger), which received investment from KR1 during its initial seed funding round a few years ago and subsequently progressed on executing on their technical roadmap of creating a modular blockchain architecture that solves the core scaling problems of today’s blockchains.
On the corporate side of the Company, the past year served as a great opportunity to improve various internal structures and functions. The most notable recent development of this being the introduction of our monthly unaudited net asset value (“NAV”) updates. These updates are currently published on a monthly schedule as public announcements and detail not only the relevant unaudited NAV and NAV per share, but also provide further insights into the top holdings of the KR1 portfolio. This process has been a long time in the making and we are thrilled to finally have the updates in production and available to our shareholders. Another important milestone for the Company has been the appointment of PKF Littlejohn LLP as the Company’s new auditors. Their expertise in the digital asset sector is highly suitable for KR1 and ensures that the Company meets all its obligations as a publicly listed company in terms of financial reporting and transparency. Last but not least, the Company also welcomed Aeron Buchanan as a non-executive director. After gaining a doctorate from Oxford University, Aeron was involved in several start-ups before joining the Ethereum Foundation soon after it was founded and was subsequently involved in the launch of Polkadot and the Web3 Foundation.
As we continue to move through 2023 and beyond, we will keep building a high quality ‘long-only’ portfolio of innovative digital assets. As in previous years, KR1 plc remains at the very heart of the crypto ecosystem, fully focused and taking advantage of the disruption that this exciting technology will bring to society.”
Excerpt taken from the annual report and audited financial statements of KR1 plc for the twelve months ended 31 December 2022, published on the Company’s website and available as an announcement here.