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Blockchain Yes, Bitcoin No: What is the Best Blockchain Stock Pure Play?

By Jim Fink on February 8, 2018

Bitcoin is a bust. Since its December 17th high price of $19,783, the digital currency has plunged 70% to as low as $5,948 on February 5th before rebounding back above $8,000. This price collapse is bitcoin’s longest and largest correction since the 85% price decline it suffered from 2013-15.

Who needs this roller-coaster aggravation? As one bitcoin trader recently put it, bitcoin’s real price is “perpetual anxiety and frustration.”

Bitcoin supporters have always argued that encrypted digital currencies are needed because they cannot be counterfeited or created at will. In other words, the benefit of bitcoin is that it acts as a “store of value” – similar to gold – and avoids the grinding depreciation of fiat paper currencies caused by endless money printing and inflation.

What a joke.

Bitcoin just lost 70% of its value. Talk about depreciation! No store of value at all.

Not a safe haven from anything. Sure, bitcoin rose more than 1,000% percent in 2017, but that doesn’t help the poor souls who purchased in late December 2017 or January 2018. A real currency is supposed to remain stable, not fluctuate like a roller coaster.

U.S. Dollars Are Good Enough – Nobody Needs Bitcoin

U.S. paper currency is not subject to serious counterfeiting. The U.S. Treasury is continually updating security features to maintain the integrity of the currency, including larger, off-center portraits with additional visual details such as colors and embedded 3-D security ribbons that change appearance with different tilts of the paper in your hand.

Purchasing power of U.S. dollars is relatively stable if you take into account the interest earned on savings. Over the past 35 years, inflation has been well contained, thanks to cost-reducing technological advances and the emergence of a “gig economy” full of temporary, short-term employment contracts.

Electronic payments are also easily performed with good old greenbacks. Ever heard of Zelle? It is used by the clients of many banks, including Capital One (NYSE: COF), to send money electronically and free to almost anyone you know. Fast, safe, and easy. A bitcoin transfer, by contrast, can take upwards of 10 hours and charges a fee.

Blockchain is the Eternal Forest, Bitcoin is Merely a Mortal Tree

Investors who are focused on bitcoin are missing the big picture. Bitcoin is just a blip in history, destined to fade away as the novelty wears off. The real story that is sustainable is the technology underlying bitcoin, which is blockchain. Think of bitcoin as a blockchain “proof of concept” and not the endgame objective for the technology.

As I wrote in my previous article on the bitcoin craze, blockchain is a revolutionary technology that creates an open, distributed ledger that records transactions in a verifiable and permanent way. Mathematical equations are utilized to ensure that the database of transactions is permanent by linking every transaction to those that came before – no transaction can be altered without breaking the entire chain! The chain structure also ensures that the record of transactions is chronologically ordered and viewable by all participants. Because the ledger is mathematical, it can be programmed like a computer to automatically trigger transactions.

The blockchain technology promises to reduce transaction costs significantly by eliminating the “middle men” of accountants, lawyers, brokers, and bankers. To a limited and figurative extent, Shakespeare’s joking call in Henry VI, Part 2 to “kill all the lawyers” may actually come true. In essence, blockchain decentralizes the trust function, which is great news since trust is probably the most critical component of business.

The more trust, the better for everyone.

The key point I am trying to make is that blockchain can utilize the current financial system to improve transactional security – bitcoin is not needed. For example, Mastercard (NYSE: MA) has instituted a blockchain transaction system based on regular local currency. The creators of bitcoin used blockchain to create the new currency, but since the need for a new currency is debatable, bitcoin is actually one of the least interesting uses of the blockchain technology.

No doubt about it, blockchain is incredibly exciting and potentially could revolutionize business and increase the wealth of the world not only by reducing transaction costs, but also by stimulating more transactions through increased trust. The Bank of England has determined that the introduction of blockchain could permanently increase a country’s gross domestic product (GDP) by a huge 3% per year.

Companies Are Unethically Taking Advantage Of Blockchain Hysteria

The promise of such amazing long-term economic benefits from blockchain, combined with the skyrocketing price bubble in bitcoin, has triggered a mad dash by investors to find investments in blockchain technology. Several companies have gone so far as to change their corporate name to include the word “blockchain” in order to attract investors and boost their stock price.

Buyer beware!

Many of these corporate converts to blockchain don’t have a clue how to monetize the technology and are misleading investors as to what their expertise in the blockchain really is. In fact, many companies adopting the blockchain name or touting blockchain capabilities have corporate histories in fields that have nothing to do with encryption technology. Examples:

Overstock.com with its tZERO securities trading platform may be the most legit of this group, but that isn’t saying much. The New York Stock Exchange and Nasdaq are not losing any sleep.

Perhaps the most egregious example of a phony blockchain business is a company called BTCS Inc. (Other OTC: BTCS), which has the nerve to call itself the only U.S. “pure play” on blockchain. The stock is trading for only ten cents per share and has a market cap under $40 million. Do you think that a legitimate blockchain company would be so small and inconsequential and trade on the Pink Sheets? Of course not. No earnings, no operating income, and no cash flow means that this company is a nothingburger. Management is threatening to resign en masse if it cannot find a merger partner soon. Yikes! BTCS is one case where investors have clearly seen through the hype and priced the stock accordingly — although it did briefly septuple in price from 0.08 to 0.57 in mid-August last year on nothing more than news that VanEck had filed to launch a bitcoin-related ETF. The VanEck filing was later withdrawn after the SEC voiced its opposition to the approval of any bitcoin ETFs.

Lesson for investors: always look past marketing hype and focus on analyzing a company’s financial statements to find the stocks most likely to outperform and be winners in your investment portfolio.

The SEC is getting serious about stopping the misleading use of blockchain in company marketing materials, including the company’s name itself. In December, the SEC imposed a trading suspension on The Crypto Company (CRCW) because the stock was skyrocketing in price for no valid business reason other than hype. In a January speech, SEC Chairman Jay Clayton warned companies that they should not change their name to suggest blockchain capabilities if their business does not actually have legitimate blockchain expertise.

Blockchain is Not Ready for Prime-Time Profits

Truth be told, there are no real pure plays in blockchain because it is too early in the technology’s development to monetize the technology on a mass scale. The Harvard Business Review characterizes blockchain as a “foundational” technology similar to the early days of the Internet, rather than a “disruptive” technology that can be monetized. The Internet began in the 1960s and did not become investable until the 1990s, a 30-year period of profitless development. Since blockchain was first seen in 2009 with the introduction of bitcoin open-source software, a timeframe similar to the Internet would place widespread monetization of blockchain as occurring no earlier than the latter half of the 2030s.

Exciting advancements are happening in the blockchain space, as seen in the work of tech behemoths such as IBM (NYSE: IBM), Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC), Amazon.com (Nasdaq: AMZN), and JP Morgan Chase (NYSE: JPM), but research is focused on profitless and open-source business consortiums such as Hyperledger and Quorum that are focused on developing industry-wide standards.

Blockchain ETFs Are Simply Large-Cap Tech

Several ETFs have been introduced that claim to invest in blockchain stocks, but in reality these ETFs are composed of nothing more than regular large-cap tech stocks that are involved in these profitless business consortiums. The only real difference from regular tech ETFs is that these blockchain ETFs charge higher management fees: 65-70 basis points vs. only 13 basis points for the SPDR Technology ETF (NYSE: XLK).

Avoid.

Pure Play Blockchain Stocks Do Not Exist Yet

So, to answer the question raised by the title of my article: what is the best pure play blockchain stock?

The answer is none. Check back in 15-20 years.


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  1. avatar
    Jeff Hagyard Reply February 24, 2018 at 9:17 AM EDT

    Why, if I am already a subscriber, do I need get another subscription to receive this information?

  2. avatar
    Luther Kennedy Reply February 15, 2018 at 12:17 PM EDT

    I invested in AML (Anti Money Laundering) Bitcoin pre-ICO sale at 1.00 because if any cryptocurrency has a chance of going mainstream, I believe its an AML/KYC coin. (KYC = Know Your Customer).

  3. avatar
    SVJ Reply February 8, 2018 at 10:42 PM EDT

    Hello Jim : I hear your Contrarian View on Crypto currencies and its underlying blockchain technology.

    People who get in early on a promising technology are rewarded handsomly.. What if , JIM .you had invested in BITCOIN in early 2009 ( thats only 9 years ago) few hundred dollars, you would have been MultiMillionaire in December 2017 !!! ( Dont have to work for ID) !!

    You like blockchain technology but dont like BITCOIN or other Cryptos..Its like saying I like Internet but dont like Email or WWW !!

    Just put in few hundred dollars in a portfolio of Cryptos and l leave it there for 10 years ..Who knows ?
    Nobody !!
    Thanks again for your thought provoking Column.

  4. avatar
    RT Reply February 8, 2018 at 10:40 AM EDT

    What a great article. Really helped me.

    Thank you, Jim!