Most years, the stock market is the hero. Historically, it’s the best creator of long-term wealth, with an average annual return of 7% a year, inclusive of dividend reinvestment and when adjusted for inflation. But 2017 was a completely different story. It was the year that completely belonged to cryptocurrencies.
When the year began, the combined value of all virtual currencies worked out to $17.7 billion. But by Dec. 21, 2017, the aggregate market cap of all virtual coins had reached as high as $654 billion, according to CoinMarketCap.com. That’s an increase in value of close to 3,600% in technically less than one year. These gains were a big reason why investors plowed into cryptocurrencies this year.
“Bitcoin” and “blockchain” are the buzzwords driving this rally
Arguably leading that charge was bitcoin. For much of the year, bitcoin comprised well over half of the aforementioned aggregate market cap of all digital currencies, and it easily remains the most traded cryptocurrency of all. It also happens to be the virtual coin more likely to be accepted by merchants.
Bitcoin also gets credit for introducing blockchain technology into the mainstream. Think of blockchain as the infrastructure that underlies most cryptocurrencies. It’s the digital, distributed, and decentralized ledger that records all transactions, and does so without the need for a financial intermediary like a bank. While the advantages of blockchain technology are aplenty, the potential to reduce transaction fees, speed up transaction settlement times (especially cross-border transactions), and improve security, are what enterprises are most excited about.
To date, we’ve witnessed a number of brand-name companies open their arms to blockchain – at least in small-scale and pilot projects. In October, Stellar announced a partnership with IBM (NYSE:IBM) and KlickEx that’ll have a dozen banks in the South Pacific region developing and deploying blockchain technology for IBM’s numerous cross-border transactions in the region.
Meanwhile, in November, it was announced that American Express (NYSE:AXP) and Banco Santander (NYSE:SAN) would use Ripple’s blockchain to test instantly settling non-card payments made over AmEx’s FX International Payment network to U.K. Santander accounts.
Sorry, folks, but this bitcoin and blockchain trend is just dumb
Unfortunately, a rather dumb trend has emerged as a result of cryptocurrency enthusiasts’ laser focus on bitcoin and blockchain: Publicly traded companies are changing their business names and focus to include the words “bitcoin” or “blockchain,” and are seeing their valuations soar as a result.
Personally, I can’t blame management teams from wanting to draw eyeballs to their stock. There’s little denying that blockchain technology could represent a major advancement for the financial services industry and other sectors, such as tech and energy. What I do have an issue with is an inflated valuation based on a name change when there’s virtually no substance behind that valuation. Let’s look at a few examples.
First Bitcoin Capital Corp.
You might know First Bitcoin Capital Corp. (NASDAQOTH:BITCF) as a company aiming to develop digital currencies, proprietary blockchain technology, and digital currency exchanges, but prior to February 2014, it was Grand Pacaraima Gold Corp., and the only asset on its books at the time were mineral rights in Venezuela, worth about $360,000. In fact, over the past 12 years, the company has changed its business focus, name, or country of incorporation five times. This all but confirms to me that management is merely chasing the next hot trend and has little experience or focus.
Between its name change in February 2014 and today, little has happened. It brought a few cryptocurrencies to market, most of which have failed to do much or generate much in the way of volume. Though it did generate $681,105 in net profit through the first nine months of the year — a result of having few expenses and employees — it hardly supports the company’s more than $300 million valuation, and it has virtually no cash on hand relative to its size.
And just to add the icing on the cake, the Securities and Exchange Commission suspended trading in First Bitcoin Capital earlier this year. Why, you ask? Following a more than 24,000% move higher, the SEC press release noted: “The Commission temporarily suspended trading in the securities of BITCF because of concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of BITCF’s assets and capital structure.”
Does that sound like a company worth $300 million to you?
Bitcoin Services Co.
Speculators might be familiar with Bitcoin Services Co. (NASDAQOTH:BTSC) and its better than 15,000% year-to-date gains, but prior to a March 2016 name change, this was a medical device company known as Tulip BioMed that hadn’t filed any financial information with the SEC since 2004. It also has no investor relations webpage, which instead directs shareholders to a “contact us” page where their questions can be answered by email.
So, why on earth has Bitcoin Services skyrocketed if it only launched its website and cryptocurrency wallet subsidiary a mere four months ago? It primarily has to do with the company’s focus on mining Dash and Monero, which are two of the largest cryptocurrencies. They also happen to be leading the charge among privacy coins, which promise beefed-up privacy and anonymity when completing transactions across blockchain networks.
Nevertheless, with minimal access to the company’s financial records and balance sheet, investing in this stock is akin to playing roulette in Las Vegas with a blindfold.
Another big-time offender is Riot Blockchain (NASDAQ:RIOT), a small-cap blockchain technology company that’s risen more than 250% this year solely because of a name change. In fact, it just so happened to be the second name change in less than a year. Formerly known as Venaxis, the company changed its name in November 2016 to Bioptix, with its only true asset being intellectual property rights related to veterinary products. On Oct. 4, 2017, it changed its name again to Riot Blockchain and announced an investment in Canadian digital currency exchange Coinsquare.
Mind you, this is a company that’s switched its focus twice over the past year. Yet, according to its press release, it “leverages its expertise and network to build and support blockchain technology companies.” Pardon the bluntness, but what expertise? They’ve been in the blockchain space for less than three months and did nothing more than make an investment in a blockchain-focused company.
According to its third-quarter operating result filing with the SEC in November, it’s generated just $72,524 in sales this year, and has lost nearly $11 million through the first nine months of fiscal 2017. Its accumulated deficit (essentially add up every quarterly loss since inception in 2000) is now over $120 million. This is a company that has failed every step of the way since it was founded, and investors think a name change is going to suddenly be the answer?
The list goes on, with JA Energy, a developer of modular climate-controlled units, changing its name to UBI Blockchain Internet (buzzword much?) in November 2016, and Long Island Iced Tea changing its name to Long Blockchain (seriously) earlier this month.
This trend is dumb — there’s no better way to say it. And there’s a very good chance that speculators who are chasing these buzzwords will soon be in for a rude awakening.