Murray Stahl: All right. So I’ll do first I don’t think the evolution of FRMO to an operating company is appreciated because it’s taken so long necessarily. So as I indicated earlier, but that’s the only thing I would say that’s important. I’ll let Steve, you can give your appraisal.
Steven Bregman: Well, there are actually many, and I think they mirror the differences between the management and because of the management, the structural and strategic philosophy and implementation of FRMO Corp versus the typical operating company, which is what investors are accustomed to because why shouldn’t they be accustomed to it. So I’ll name a couple even. So for instance, cash. So there’s an awful lot of cash and effectively cash and marketable securities on the FRMO balance sheet. And I’m sure pretty much everyone on the call, anybody who follows small value oriented companies realizes that a business doesn’t get any kind of valuation multiple on cash. Even though in a sense of cash is the most basic valuable thing you can own during difficult times or in times when it can be an opportunity.
In fact, sometimes companies sell at a discount to their cash or the cash is discounted on the balance sheet in terms of its public market value. And yet, there’s this thing that happens that you can have a company that on the last day of a certain month, owns a bunch of cash on the balance sheet. And in the first day of the next month, that cash has been invested in something, some asset. It doesn’t matter what you call it. Call it, you know, a big office building or some real estate property or something else or a different company. And all of a sudden, people will apply some multiple, maybe a big multiple of that cash that’s now in the form of the new assets that’s been purchased that can happen overnight. As Murray has already described, there are more elements of businesses within Horizon Kinetics and FRMO Corp that are on their way to becoming public.
And you get the highest multiple for any business in the public markets. And Horizon Kinetics will have its some form of public valuation and that will get us more eyeballs and legitimacy and so forth and so on. And I’d like to mention, it’s interesting that the questions we’re getting today for this particular conference call. There are many more participants in it than we’ve had before. New names I don’t recognize and the breadth of questions are greater. And if that’s any kind of indicator of the earliest dawn, the early light of additional interest between Scott’s Liquid Gold and some of the other businesses that are pending relative to the public markets, then we’re heading in the right direction as far as valuation goes.
Therese Byars: Okay. I have been told that nodes have more control over the Bitcoin blockchain than miners, is that true? Does FRMO or any associated companies like Horizon Kinetics or TMST up or run nodes. Could they explain the difference, please?
Murray Stahl: Okay. To begin with, we don’t run any nodes. But nobody runs — nobody has control over the blockchain. No miner has control over blockchain. No node has control over blockchain. The miners provide a service of validation of transactions. Nodes are just aggregations and miners that enables miners to communicate with one another. That’s it. There’s nothing mystical about it. The whole idea behind Bitcoin is, it’s decentralized. Nobody is supposed to have control over it. Because every time somebody gets control over monetary system, you see what happens. It gets abused. So but it’s very hard for people to think about that because it’s totally outside of your experience. So let’s use this as an example. We, living today in our lifetime, we don’t know anything other than the central bank system of fiat money.
We never experienced anything else. Now you could say we in FRMO, we experienced something else. But very few people experience something like that. They look at the price of Bitcoin. And even that is the wrong way of looking at life. You see they’re looking at Bitcoin as if it’s some kind of stock. It’s quoted. Bitcoin is trading at x, but that’s not true. Bitcoin is not an asset in that sense. Its value is relative to the fiat currency, you’ll say, well, Bitcoin went up so much percent over the course of its life, not true. So dollar lost value in relation to Bitcoin. If we were priced that way so instead of Bitcoin going up x percent, if someone said the dollar lost x percent in relation to Bitcoin, people would say, my God, my dollars are losing value in relation to Bitcoin.
Everybody would then try to buy Bitcoin. They just think it’s a stock. So they don’t really know what it is yet. So no one has control over the blockchain. There’s not going to be any shortage of Bitcoin no matter how high it goes. Because and I’m going to confuse people by saying it, but it’s nothing other than the truth, and maybe you can ask a follow-up question, and I’ll clarify it. If there ever was such a thing as a shortage of Bitcoin, you can always fork the Bitcoin Network, anybody can do it. I can do it myself if I wanted to. I could change the properties of Bitcoin, I could make them the same, I could tweak it. I could do whatever I want to do. It hasn’t been forked.And people are going to use to fork, they’re not going use to fork.
So nobody is controlling of anything in Bitcoin. That’s the virtue of it because nobody can gain the system. Nobody has the power to manipulate the interest rates, nobody has power to manipulate the money supply. The issuance goes in accordance with a predetermined protocol and that’s the way the system works. So it’s really very simple.
Therese Byars: Would you, here are some questions. There is — what are your insights on mining Bitcoin rather than directly purchasing Bitcoin as well as Bitcoin Cash will be appreciated. It goes on, FRMO has pursued a Bitcoin mining strategy for several years. On prior conference calls, you have listed the many challenges that Bitcoin miners face, i.e. periodic reduction of block rewards, obsolescence of rigs, increasing hash rate and electricity costs, et cetera, and the needed skills to navigate these challenges. It appears to me that the returns from buying Bitcoin to US dollars have outperformed purchasing the publicly listed miners for most time periods. FRMO has $38,822,891 in cash and cash equivalents as on February 29th, 2024. Why does it not dollar cost average purchasing Bitcoin as part of its cash management strategy since the purchasing power of the US dollar is being diminished by inflation? And there’s a couple of more, but I think I’ll stop there.
Murray Stahl: Okay. Let’s answer this first. Let’s just answer this one then we’ll get the other ones because it would be a cardinal error. Because the purpose of the money is not to protect against the basement. You might say it is being debased by inflation, you might be right about that. But in the world of cryptocurrency mining equipment, the person power of dollar is going up. So it’s there as an insurance policy. If the public trade miners get in trouble as it might happen, maybe we could buy a certain asset, that’s really cheap that we want. So put it this way, you don’t get a return on insurance. Insurance protects you against certain contingencies that you hope will never happen. Usually, it don’t happen. So is that a bad use in capital.
If you spend money on insurance, I would look at it this way. It’s there to provide for certain contingences. There will be opportunities at some point, we might use some rollback that cash. We might not, depends on what happens. But the purpose is not to maximize the return that way because you’re never going to maximize return that way. We’re fully invested if you — it’s not a portfolio. It’s a corporation. It’s got to have a certain organic rate of return. So in a corporation, lots of corporations traded at big premiums to book value, and they have cash. In a portfolio, you really don’t want to have any cash other than transactional balances, but it’s not a portfolio. It’s a living, breathing, growing corporation. It’s just not apparent to people that it is.
And that answers incidentally a question that was posed before why it doesn’t have a higher valuation well because the question is, is it a portfolio? Is it an operating company? If it’s a portfolio, so we did that and we took the cash and we put it all into Bitcoin, let’s say, or maybe left a few dollars. I guarantee you, in my personal opinion, we trade at a lower and a higher valuation. Because there’s no — we gave away optionality, can’t do that and expect to trade your premiums and asset value. So I think that addresses that. I hope addresses that so why don’t you read the rest of it.
Therese Byars: Also it appears that MicroStrategy’s practice of issuing convertible debt at low interest rates has worked well for the company and the purchases of its debt. Have you considered doing something similar?
Murray Stahl: No, I have not considered doing something similar, and I don’t have any intention of doing anything similar. And that policy is not without its risks. So you never know what’s going to happen to a crypto currency. The whole project could still fail. It’s possible. So if it fails, the last thing you want to do is have debt against your major asset, which is crypto. So debt and crypto do not mix very well. And the stock exchanges are littered with the casualties of companies that decided to use debt capital to finance cryptocurrency purchases. In this particular case, it’s been successful, but many people tried that strategy, and I won’t list the names, but they’re in public domain, didn’t work out that well. Could have worked out well, but it just didn’t.
Remember, when you take on debt, debt has to be paid on time and you lose your strategic flexibility. So just a risk, I don’t feel like taking. I don’t think we need to. So we have it. So what’s the next question?
Therese Byars: Okay. The next part of that one. On prior conference calls, you have mentioned that Bitcoin Cash could potentially appreciate much more than Bitcoin due to its similar monetary policy, but lower cost per point. As of February 29th, 2024, 6.71 Bitcoin Cash are held by FRMO and 0.33 Bitcoin Cash are held indirectly. This amount is around US$2,200. So I’m curious as to why it has not been invested why it has not invested a larger de minimis amount into this coin given its potential appreciation.
Murray Stahl: Well, because you don’t need to basically. If it works, you only have a small number of shares. You can buy it instantly before you go on. In my point, the amount, let’s say, Bitcoin Cash held directly — held indirectly to private — public and private company use 62,017 held directly 2,382. And those are Bitcoin Cash Investment Trust. And we have some Bitcoin Cash shares Bitcoin Cash coins itself, the numbers we read correctly, 6.74, 0.33, respectively. Those numbers are going to change and go up. As of February 29th, we hadn’t yet mined a lot of Bitcoin Cash in Winland. And given our holdings in Winland, I think, in due course, you’re going to see a lot more Bitcoin Cash. So basically, if it goes up, it’s going up by a staggering amount.
So you don’t need a lot. All you need to have is enough to make an impression. So you look at the cost basis of GBTC, Grayscale Bitcoin Investment Trust, you can’t see it in this. But we made a small investment. Now it’s just a tremendous value. You don’t need a big investment. You have to have just enough investment that if it works, you’re going to make a favorable impression upon the net asset value. And if it doesn’t work, you’re going to live to fight another day. That’s the philosophy. So what’s the next question?
Therese Byars: Okay. Given FRMO and Horizon Kinetics thesis of investing in under-invested hard assets. Why have investments in coal-related equities been avoided? More specifically, what are your thoughts on the investment merits of the asset-light coal-related partnership Natural Resource Partners, NRP?
Murray Stahl: Okay. We haven’t invested anything in coal. And the only one reason for that, I don’t think coal is going away. However, usage of coal in the United States, it is declining. But more importantly than that, the government is extremely hostile to coal. So we just don’t want to invest in a business that the government is really hostile towards. And as far as I can tell, they’re going to be even more hostile towards. So we have other things to do with our money. I don’t think they’re going to be able to make coal in the United States in the foreseeable future, maybe not ever. And by the way, according to International Energy Agency, globally, 2023 was the record year for coal consumption worldwide. So but it’s a fight that we just don’t want to be part of. That’s the only reason for not investing in it.
Therese Byars: Looking at the latest reports from Winland Holdings they mined 56 Bitcoin in 2021, 71 Bitcoin in 2022 and only an additional net of 75 Bitcoin in 2023 due to selling of units in that year. Given management’s past comments on the benefits of an operating Bitcoin miner that banks of Bitcoin earnings and accrues that to its balance sheet versus spot ETFs that most ultimately sell portions of their holdings. Why did Winland, which has been effectively run by Horizon Kinetics sell the majority of the Bitcoin in mind in 2023, which ultimately resulted in realized losses on sales of Bitcoin per Winland’s most recent annual report, Note 17. How should investors think about the rate of accumulation of Bitcoin at Winland?
Murray Stahl: Well, there was — the rate of accumulation reduced because the equipment was starting to get old. And the only way you can remedy that is machines went out offline and you got to pay the electric bill. The electric bill is big. So and we need money to buy new machines, we got to replace equipment cycle. So the major asset we have is that. So money has come from somewhere. So we’re going through an equipment cycle. We managed to grow the number of coins, it just isn’t grow at historical rates because we’re still going through equipment cycle. And I think you’ll see in the next couple of months, you’ll see we’ve navigate successfully. We didn’t issue shares, well, actually, we did issue shares to FRMO, but it certainly wasn’t a big amount.
So just going gradually and increasing our Bitcoin holdings. And also, don’t forget, another factor is we moved machines from Bitcoin to Bitcoin Cash. So we have less machines working on Bitcoin. And another factor is in our replacement equipment, we had mined Litecoin before. We spent some money on buying Litecoin equipment which we could have bought Bitcoin equipment to keep the rate as high as it was before. But Litecoin is more profitable, they want to diversify.
Therese Byars: In the past, management has mentioned that one of the main benefits of an asset-light hard asset company is the ability to invest countercyclical versus the wider industry that the asset-light hard asset company may be a part of. Perhaps I’m mistaken on this, but FRMO did not appear to make significant investments during the 2020 COVID market shocks or in the 2022 crypto winter despite the company’s strong balance sheet. In 2020, management commented in a quarterly meeting that they did not see any opportunities to buy a whole operating business, yet Winland appears to be the target for that purpose and has been in FRMO’s portfolio since around 2015. Why didn’t FRMO use its large cash balance in the depth of the 2022 crypto winter to finish buying out a majority of stake in Winland?
It does not appear as it’s doing. So would it have been a mutually exclusive or contradictory decision to FRMO’s step-wise strategy in buying new mining equipment? What kind of event would spur management into using the cash balance of the company, if not a global economic shutdown on our 2008 moment in the cryptal industry? It should have seemed that buying up the rest of the targeted 51% stake in Winland would have been only a small portion of FRMO’s cash balance during the recent crypto winter? That’s the end of that question.
Murray Stahl: Well the most recent crypto winter was about the fact that other people were buying — were issuing shares just right before the crypto winter. What cost crypto winter is a lot of companies issued shares and bought a lot of cryptocurrency mining equipment. That equipment appreciate in value. Sixfold, meaning the price at which you could have bought a machine right before the crypto winter. And then on the eve of the crypto winter, the price machine went up, I think, from $2,000 to leading model was in to $12,000. At one point, you even got to $14,000. So, yes, it was going down because the machines were being marked down. So to buy the machines during the crypto winter would be to take machines that are destined obsolescence, who we’d have to value the shares with the machines at their then market values.
Shares that we knew in a couple of years, machines we knew it in a couple of years are going to be worthless. And we’re going to pay $12,000 a machine. I don’t think so. So we didn’t do it.
Therese Byars: Given the small relative scale of Winland versus FRMO, what is management’s goal enrolling FRMO into Winland as an operating business versus doing crypto mining at FRMO itself at a scale commensurate with FRMO size? Winland presently makes up around 2% of FRMO’s assets, total assets. How would this ever be of material value to FRMO?
