Over the last few months, I slowly added lines here & there to this post in my head. Well, the original: It soon evolved into a bear of a cryptocurrency & blockchain primer. One which, anticipating an eventual audience, kept dragging me down an endless rabbit-hole of what about & what if questions…
It’s astonishing such a new innovation has attracted so much passion & opinion so fast. [In reality, its key components – cryptography, a distributed ledger (i.e. a peer-to-peer network), digital money – have existed for decades. The genius of Satoshi Nakamoto was applying them in such a radical & elegant new way]. We’re barely outta the gates here, but it seems like everybody’s already adopted a fervent position of advocacy, denial, or just plain old ignorance… Take your pick & damn the facts – close your eyes & you’d swear it’s politics, not technology.
But maybe this is no surprise – after all, we find it harder to talk (rationally) about money, even more than sex!? ‘Cos it’s personal. And emotional…nothing evokes those familiar demons, fear & greed, more easily than money. And that deeply personal relationship’s become even more fraught & anxiety-ridden – particularly in the West, with more to lose – as we live in a post-financial crisis world, with increasingly meagre economic growth prospects, relentlessly climbing public & private debt burdens, ever more polarised voters, and with even the future of work threatened by technology.
And then, Bitcoin: A new paradigm, uber-money, a stateless & entirely digital currency. Which only served to ratchet our fear & greed even higher. Too many struggle with the apparent irrational exuberance, and even more so the sheer intangibility, of cryptocurrencies. Which inevitably invokes a much deeper fear, of the same intangibility inherent in our fiat currencies, our fiscal obeisance to governments who seem dead-set on printing & spending their way into oblivion, the fragility of our financial assets & markets (which now exist only as electronic blips on hackable centralised repositories), and our economic future & security itself. Hence, that recent primal scream of denial:
[Yes, I counted – Howard Marks really did use five exclamation marks.]
But we also flog ourselves into a real frenzy of greed: How did we miss out so completely on Bitcoin’s incredible & stupendous gains over the last few years (even this year!)? We wonder if maybe, just maybe, this is still the beginning…could a cryptocurrency (or two) ultimately scale up to match the gold market, or even a major global currency? [So why didn’t the media swarm Murray Stahl, as they did Marks or Jamie Dimon? Here’s Stahl’s incredibly bullish take. Ironically, he helped inspire Marks’ next letter, a rather grudging & half-hearted mea culpa]. We even speculate whether investing in the blockchain is a chance to go back in time & actually get in on the ground floor of the internet itself?!
But as any good investor knows, you can’t argue with fear & greed. You have to trick them, beat them, eliminate them…and focus instead on a rational & unemotional investment/stock selection process. And so, in that spirit, I abandoned my original post for a more pragmatic approach. I bow to all the writers, journalists & bloggers out there who can offer far better primers than I ever could, and who’ll tease out all the pros/cons/arguments/risks you could ever want. But if you’re still reading here, can I presume you (tentatively) agree cryptocurrencies are actually money (or an asset class), and blockchain is potentially a hugely disruptive/even foundational technology?
But I will presume you’ve been generally disappointed with the recent barrage of ‘How to invest in Bitcoin/ICOs/Blockchain!!!’ articles/posts – just like me (frankly, I expected more from this recent Barron’s effort).
It’s about time I try fix that…
I count five different possible investment approaches, and I’ll dispense with four of them pretty quickly:
Mining: Just don’t… Or else: i) Move to China (cheap electricity), or Iceland (which has the added bonus of a cold climate), ii) hire a team of scary young Eastern European hackers, iii) buy a couple of acres of ASICs (or GPUs for Ether/other cryptocurrencies), iv) pool with your rivals to smooth out coin earnings (today, just six Chinese pools dominate global Bitcoin mining). This really is a big boy business now. And be wary of cloud mining – of course, there are legitimate hosts out there, but many have precious little incentive to share/rent out/finance their mining resources, so what’s on offer could be a scam. Alternatively, you could mine new cryptos on a smaller scale…except if you’re successful, and/or the coins rapidly increase in value, larger miners will inevitably swoop in.
Buy & Hold: What…Bitcoin?! After it’s rallied 300% YTD, nearly 1,000% over 3 years, and an astounding 33,000% in the last 5 years? That’s pretty brave…I still can’t figure out what gold’s worth!? [And Bitcoin’s conceivable value range is many multiples of gold’s range]. But going short Bitcoin is braver still: Ask yourself, how many shorted that insane trajectory…and why, finally, is this now the right time to short? Then there’s Ether: Up 3,400% YTD!? Maybe you can just trade/arbitrage them – yeah but, that’s a whole new career! Not to mention, where do you store your keys/cryptocurrencies? Hackers can’t hack the blockchain, but who cares when they’re so good at hacking websites, computers & the inevitable weakest link (i.e. humans).
Initial Coin Offerings: What about the hundreds of other cryptocurrencies, with new ones arriving every other day…knock yourself out with this list!? Sure, many of the opening day ICO premiums & subsequent price rallies we’re seeing are truly astonishing. And while Ether’s a key driver, other supply/demand factors have played an equally important role in delivering these ICO gains (reminiscent of the original dot-com bubble). [Not to mention the longer-term commercial/investment potential of some of the underlying projects & technologies]. But who’s got the connections & the speed/resources to even access these ICOs? Or distinguish the wheat from the chaff…or should I say, from the ridiculous, the hopeless, the worthless, the fraudulent?! And what are you buying exactly? [And if you’re American, for example, what does the SEC think you’re buying?!] Good luck with all that – again, it’s a whole new & different career.
Blockchain: So what about some blockchain venture capital investment? OK, how about finding the next social media/artificial intelligence super-unicorns while you’re at it?! Again, do you have the connections? Even if you join an angel network, how many (genuine) blockchain-related opportunities do you expect will come calling? Clearly, VC firms are pretty excited about the technology & its potential – you can bet they’ll soon have funding all sewn up for the best start-ups out there. Doubtless, some huge personal fortunes will be harvested here eventually, but the odds are really stacked against you…
And so, as we see with most sectors & investment themes, the safest & most practical investment approach for the vast majority of investors is inevitably via:
Listed Investment Companies
I call them investment companies, because right now that’s what they are…
Most are focused on investing in cryptocurrencies (primarily via exchanges/ICOs & less so via mining), and seeking out/making crypto & blockchain-related VC investments. While those actually developing crypto/blockchain technologies & businesses tend to have zero revenue now…so while their cash burn may ultimately prove a wise investment, meanwhile such expenditure/intellectual property may not even deserve recognition as an intangible asset. Not to mention, their inevitable need for more funding. Not surprisingly, the latter companies often boast more expensive valuations, but may also offer the biggest opportunity in terms of success (or failure) vs. companies boasting a more diversified portfolio of investments. It’s only fair to offer two lists here – almost 60% of the companies I’ll designate also-rans (no insult intended…well, mostly!). But first, a necessary:
Fear the walking dead: Usually headed up by crooks & clowns – whose names, faces, and business strategies change every couple of years, whose press releases & filings are usually out of date/scarcely believable, who are always flouting the regulators (but never seem to get prosecuted?!), and whose losses/outstanding shares climb relentlessly (so they fool investors with serial reverse-splits). [If in doubt, late/non-existent regulatory filings are a great filter. And no, I didn’t screen for fraud…they usually have such ridiculous stories & valuations, it’s irrelevant whether they’re frauds!] But cryptocurrencies & blockchain are en fuego now, so as they say on Wall Street:
When the ducks are quacking…feed them!
Even better, combine two hot trends…yes, crypto-cannabis companies are a thing now! In all good conscience, I can’t recommend such companies as longs, or even shorts! I mean, check out some (recent) price charts – sure, many will target zero, but meanwhile their potential crypto-related volatility/valuations may be positively (or negatively) astounding. But hell, if you can stand that diseased hooker stink, these may be perfect trading sardines* to explore…
At the larger end, it’s (mostly) reputable companies who’ve now started to dabble & invest in cryptocurrencies & blockchain, but it isn’t their main corporate focus (yet) & their investment/exposure is still relatively small vs. their overall balance sheet (and P&L). However, stories can change rapidly – and looking at their charts, it’s obvious many have enjoyed crypto-related booms (& some busts) this year, despite the diluted exposure they offer. Again, it’s debatable how you might play these: Maybe you buy them simply because a lazy & uninformed mainstream media will probably keep recommending the likes of Overstock.com, AMD & NVIDIA as Bitcoin/blockchain plays, or sell them ‘cos there’s far too much of a valuation premium built in already (NVIDIA, for example, is also enjoying an AI-related tailwind – it now sports a 52 P/E)?
Here’s the full list of also-rans – a grand total of 23 companies:
i) American Security Resources (ARSC:US)
iii) Coin Citadel (CCTL:US)
v) HashingSpace (HSHS:US)
[Yeah, some companies don’t even seem to have websites anymore…so how on earth do they keep trading?! NB: For US stocks, if you exhaust all other info sources…OTCMarkets.com may be your best & last port of call.]
OK, time for the real deal now – here’s all the companies I’ve identified where cryptocurrencies & blockchain are (now) their primary business/investment focus, and/or they comprise a substantial component (say, 25-33%+) of their balance sheets (or P&Ls).
Again, the same HEALTH WARNING!!!
Obviously, some companies are still feeding the ducks here. [Suckers love a good story…so ridiculously inflated valuations are usually fair warning anyway]. But if their stated corporate focus now is cryptocurrencies & blockchain, and their SEC/regulatory filings are actually up to date, at this point I’m willing to keep an open mind & take a closer look. To begin, here’s some important notes:
- All share prices & market caps are CoB Sep-20th.
- Price/Book ratios based on last reported equity, subsequent fund-raisings, plus some (occasional) realised equity investment gains…I do NOT attempt to track & incorporate realised/unrealised crypto gains here, so multiples may be over-stated.
- I include an Expense Ratio if it’s (somewhat) reasonable, otherwise I highlight the estimated months Cash Burn the company can currently fund, or an actual Return on Equity in one rare & profitable instance.
- FINAL WARNING: Two companies with up-to-date filings have managed to continue trading/avoid bankruptcy, despite NEGATIVE equity balances. Sure, they might raise new capital/restructure successfully, but it’s wise to assume the current outstanding shares could well become (near) worthless in due course…
So who knew…I’m beating Barron’s outta sight here, with a grand total of 16 companies for you to consider:
Share Price: 0.255p
Market Cap: GBP 1.8 M
Expense Ratio: 3.9%
Comment(s): Early-stage & pre-IPO disruptive technology investment company. Has steadily reduced its stake in BTL Group (see below) to 3.3%.
Share Price: 3.25p
Market Cap: GBP 3.6 M
Price/Book: 1.5 P/B
Expense Ratio: 10.8%
Comment(s): Early-stage blockchain technology investment company & accelerator. Recently signed co-investment MoU with ICO hedge fund HyperChain Capital, and successfully exited its stake in SatoshiPay.
Share Price: 4.25p
Market Cap: GBP 4.1 M
Expense Ratio: 7.0%
Comment(s): ICO & blockchain technology investment company.
Share Price: $0.0156
Market Cap: USD 7.2 M
Price/Book: NEGATIVE Equity
Share Price: 0.35p
Market Cap: GBP 6.0 M
Price/Book: 1.7 P/B
Expense Ratio: 7.9%
Share Price: $0.129
Market Cap: USD 12.1 M
Price/Book: NEGATIVE Equity
Share Price: A$0.061
Market Cap: AUD 24.5 M
Cash Burn: 14 Months
Share Price: $2.19
Market Cap: USD 33 M
Expense Ratio: 1.5%
Comment(s): $760 million AUM investment manager with a primary focus on gold & natural resources. Now has a 4.4% direct & 3.1% indirect stake in HIVE Blockchain Technologies (see below), and plans for its 65%-owned sub. Galileo to potentially offer cryptocurrency funds (see here & here).
Share Price: C$3.07
Market Cap: CAD 57 M
Cash Burn: 10 Mths
Comment(s): Private blockchain enterprise platform (Interbit) provider – working with companies like BP/Visa/Eni/etc. Vela Technologies (see above) is now a 3.3% shareholder.
Share Price: €167.44
Market Cap: EUR 80 M
Expense Ratio: 2.5%
Comment(s): Passive Bitcoin investment, via an exchange-traded note. Sister ETN to larger Bitcoin Tracker One – SEK (see below).
Share Price: $2.64
Market Cap: USD 105 Million
Cash Burn: 0.6 Months (>5 Years per new $35M Equity Agreement)
Comment(s): Bitcoin mining company. Also potentially developing privacy/cyber-security products. Headed up by the mad bad John McAfee (name change to John McAfee Global Technologies in the works).
Share Price: SEK 159.42
Market Cap: SEK 1,082 M
Expense Ratio: 2.5%
Comment(s): Passive Bitcoin investment, via an exchange-traded note. Sister ETN to smaller Bitcoin Tracker EUR (see above).
Share Price: $4.8537
Market Cap: USD 178 M
Cash Burn: ZERO Cash
Comment(s): Blockchain technology development company. Chinese company & website – per latest SEC filing, zero revenue/investments/cash.
Share Price: €51.00
Market Cap: EUR 255 M
Return on Equity: 16% (i.e. profitable)
Comment(s): Blockchain technology investment company. Currently owns Germany’s only regulated Bitcoin exchange (www.bitcoin.de), with Ether trading also planned before year-end.
Share Price: C$1.84
Market Cap: CAD 417 M
Cash Burn: 12 Months (per expense forecast – inc. NO mining revenues)
Comment(s): New cryptocurrency mining & investment company (via Leeta Gold, see here & here). Has acquired Iceland cryptocurrency mining facility (with an option for 4 more data centres) from Genesis Mining, a world-leading cryptocurrency mining service provider & now a 30% shareholder in HIVE.
Share Price: $710.00
Market Cap: USD 1,327 M
Expense Ratio: 2.0%
Now that’s done, let’s rank our listed cryptocurrencies & blockchain sector by YTD gains:
The sector’s up an average 371% YTD, but with the highest gains mostly accruing to the larger (& generally Bitcoin-focused) companies, the market cap weighted gain is 590% YTD. While the sector’s clearly outperformed Bitcoin this year, it’s more notable that it’s actually fallen well short of the YTD growth in the underlying cryptocurrency market, and a mere fraction of Ether’s YTD gain.
Now let’s summarise the resulting sector Price/Book multiples:
The sector’s market cap weighted average P/B ratio is 20.0, obviously skewed by some quite extraordinary multiples. Backing out the top two outliers, the multiple drops to a somewhat less alarming 6.6 P/B – unfortunately, at this stage of the game, access to a brand new sector can be expensive. However, it’s worth noting the usual gigantic value gap between UK & US/Canadian multiples, while the sole non-tracking European multiple (i.e. Bitcoin Group) attests to the power of scarcity value. Also, the 2.0 P/B multiple on Bitcoin Investment Trust, a Bitcoin tracking vehicle, is also remarkable – again it’s all about scarcity/access, plus the open-ended functionality of this trust is actually quite impaired, producing consistent/high NAV premiums. But with maybe half a dozen Bitcoin (& Ether) ETFs (EtherIndex, Winklevoss, SolidX, VanEck, Rex) still waiting in the wings for possible approval, such a huge GBTC premium is simply an accident waiting to happen…
And finally, the most important table – essentially a repeat – focusing this time on USD Market Caps:
This table explains my apparent lack of concern re the sector’s current valuation multiple. Big picture, it’s pretty astonishing the entire sector’s worth just $2.6 billion…which potentially offers significant asymmetric risk/reward. If – of course, that’s still a huge IF – the sector (& underlying cryptocurrency market) is still only embarking on a positive long-term trajectory, it could prove a really tiny door for investors to get through…by comparison, the total crypto market itself is now worth about $135 billion. And of course much of that is effectively house money, so people are ready to play fast & loose with it. Again, I’m reminded of the dotcom-bubble. Which most people now remember as a collapse – fortunately I side-stepped that disaster, so in reality I learned how incredibly irrational a genuine bubble can actually become…
And so, it’s decision time:
You may think we’re just a few innings in here, and both the cryptocurrency market & the listed crypto/blockchain sector are still headed for the moon. You may believe cryptos will slowly fade away & die, whereas blockchain is genuinely a foundational technology that will actually change the world. Or you still think they’re simply ridiculous Millennial play-things, soon to be forgotten just like this year’s spinners. But as I highlighted above, I suspect valuation may not be the best filter/catalyst here – the opportunity may be so big, the most expensive companies may just win out in the end, the clowns could fall into a gold mine, and maybe even the crooks are actually tempted to go straight! On the other hand, if cryptocurrency prices peter out & collapse, investors could simply decide they hate the entire sector…and may just as easily drag down blockchain companies/valuations along with the rest. And being right isn’t enough either – because if you’re too early, it’s just another way of saying you’re dead wrong (esp. if you’re short).
And in the end, my view’s unimportant…even if I presented a really compelling argument. Because regardless of direction, the sector promises one hell of a bumpy ride ahead – nobody will dispute that! So it’s critical to arrive at a strong view of your own – long, or short – one that you’ll actually have the guts to live with day & night, through the inevitable reversals. And if you refuse to do that, I’m afraid it’s no excuse to feel comfortable: How else can you hope to identify potential future risks (or even opportunities) lurking elsewhere in your portfolio – or even, ultimately, your career? As all too many investors discovered to their bitter cost, after ignoring/sneering at Amazon.com (& other successful online retailers & businesses) for so many years.
So I’m no oracle here. Apologies if I don’t offer up some simple answers, but what I am offering is the entire listed cryptocurrency & blockchain universe for you to explore & consider further. That’s certainly a great start in what’s still virgin territory for most investors…and maybe, just maybe, you’ll surprise yourself & actually discover a few decent longs, shorts, or trading sardines?!
[NB: Of course, if you come across any other listed cryptocurrency and/or blockchain-related companies out there, do let me know & I’ll try cover/include them here too – just comment below, or email me.]