Bitcoin, and the rest of the cryptocurrency universe, continues to enthral and entertain some while befuddling and bewildering others. No prizes for guesses which camp I am in. Here in the UK it’s all a bit of a fairground sideshow with few other than true apostles taking it seriously. That is beginning to change and like all central banks, the Bank of England is alert to the young upstarts and is taking steps to increase its institutional knowledge of this digital phenomenon which has gripped the attention of markets, entrepreneurs, organised crime and law enforcement across the world, (although the extreme volatility is likely to deter criminals from trusting it). Expect growing regulatory interest in cryptocurrencies to be a theme for 2018. Cryptocurrencies are the Wild West of the investment universe with zero regulatory oversight, high cyber risk, no deposit insurance and no central clearing body. Notwithstanding the fact that criminals have the potential to run rings around money laundering legislation
It is said that about 40% of Bitcoin is owned by around 1,000 people, most of whom live in the San Francisco Bay area. But, the dominant forces in Bitcoin are in Asia. In Japan for example, there are roughly 1 million Bitcoin day-traders and somewhere in the region of 300,000 shops who accept Bitcoin for payment. South Korea, Asia’s fourth largest economy, which until this week accounted for 20% of daily volume in Bitcoin, has three of the largest Bitcoin exchanges but has recently banned trading in Bitcoin futures. The justice ministry there is considering banning Bitcoin completely. Expect more regulators to toughen their stance.
Examples of the ‘Madness of Crowds,’ are not hard to find. In December Long Island Iced Tea Corp, a soft drinks maker, changed its name to Long Blockchain Corp. Its shares rocked 350% higher in three days. Then, the company announced it would sell shares to raise $7.74m saying in its filing that “it was shifting its primary corporate focus towards the exploration of and investment in opportunities that leverage the benefits of blockchain technology.” Moving quickly the company then announced it had entered into a purchase agreement to acquire 1,000 ‘mining rigs,’ to be used to ‘mine bitcoin, bitcoin cash and any other cash using SHA256 algorithim,’ for $4.2m. So, in two weeks the soft drinks company which incidentally intends to continue to manufacture soft drinks has changed its name, raised an improbable amount of cash and now ‘is focused on developing and investing in globally scalable blockchain technology solutions. It is dedicated to becoming a significant participant in the evolution of blockchain technology that creates long term value for its shareholders and the global community by investing in and developing businesses that are “on-chain.”
LBCC though, is in the nursery compared to others out there. How about UBI Blockchain Internet who filed with the SEC to sell 72.2m shares owned by management? Back in 2016 it acquired a shell company called JA Energy and changed its name. In the December mania the shares rocketed 1,100% in just 6 days from $7.20 to $87 giving it a market cap of $8bn. 3 days later the shares plummeted 67% to $29. Still though giving it a market cap of $3.6bn, not bad for a company with no revenues and an operating loss of $1.83m in 2017 and a disconnected telephone number in its filing. Proceeds from the share sale were destined to go to management, not the company. Unsurprisingly, the SEC suspended the shares on Monday.
Oh there is more, much more. Longfin listed in December in the US. In its filing it said it had revenues of $298,000 last year and $75 in cash. Two days after listing the shares soared 2,700% giving it a market cap of $7bn after making an announcement with the word ‘blockchain,’ in it. The shares have more than halved since but still sit at a numbing $45.65 with a market cap of >$4bn.
Digital Power, which makes power supplies for computers, saw the afterburners light up behind its share price when it announced it would aim its services at cryptocurrency miners. That was worth a near 900% share price rally. The shares subsequently lost about half of the rally but have still massively benefited from just one announcement mentioning cryptocurrencies.
So, what is blockchain and what is bitcoin?
Blockchain is the clever bit. Simply put, it is an ever growing record of all the transactions ever done in bitcoin. It is the grand (digital) ledger which cannot be retrospectively altered. There are though, thousands of copies of the grand ledger, all of which are updated when a transaction takes place checking for consistency to confirm you have the bitcoins you claim to have. When it all checks out the new transaction is added to all the ledgers simultaneously. Because all the ledgers have to reconcile to confirm someone’s ownership no central entity, (like a bank), is needed. The problem, or the advantage, with blockchain, is that it is free.
While there is a limit to the number of bitcoins that can be created there is no limit to the number of cryptocurrencies that can be created. Yep, just a cute name and a few hours at the PC with some moderate skills and you too could be off and away. Something not lost on the creators of Dogecoin. It was started as a spoof (Doge-coin) and now has a market cap of $1bn, one of more than 1,365 crypto coins out there.
Some, including Goldman, Citi and indeed one of the Crumble kids believe that cryptocurrencies are viable as an alternative to traditional stores of value. Perhaps they will be but certainly not until government enforcement through regulation dampens their volatility.
The coins though have no intrinsic value. Bitcoin itself is simply an electronic receipt listing a line of transactions and is backed by fresh air…… and there are another 1,364 in a growing list of other coins out there. Of course, it has market value, for the moment but that is simply a supply and demand equation that can evaporate with fickle fashion driven users as quickly as it arrived. The valuable asset is blockchain technology but you are not buying that technology when you buy bitcoin. Blockchain is free, absolutely free which is why the barriers to new coin entrants is non-existent. It is also where the value lies. When the coin mania subsides, and a bunch of people are counting their losses and a smaller number their winnings, new ways to use blockchain with positive social and economic utility will emerge, some of which will properly benefit our daily lives.
Before that happens, I am joining the party. The launch of CrumbleCoin is just around the corner.