Born Again Blockchain?

April 11,  2018

One of the most astonishing trends of 2017 was the explosion in the value of cryptocurrencies. It was almost impossible to scan the headlines of any financial website without seeing “Bitcoin” or “blockchain” somewhere in the mix on almost any given day. The returns for cryptocurrencies—and companies purporting to use blockchain to enable some form of business solution—were astronomical last year, especially in Q4. 

These returns were not for the faint of heart, however, as there has been massive volatility in the space, especially after the sharp cryptocurrency selloffs in late December 2017 and again in late January and early February of this year.While investors are flocking in droves to these new instruments and companies, the securities lending market seems to cast skepticism on the returns for newly minted blockchain companies at present. 

While the share prices of these firms have gone parabolic, so too have the fees to borrow these thinly traded (and in some cases previously low-priced) names. DataLend captured some compelling data on these stocks at the end of 2017 and early 2018, many of which were trading over 10,000 bps and in some cases as high as 25,000 bps.

One new blockchain company that stands out from the rest in many respects is a company previously known as the Long Island Iced Tea Corporation, now known as Long Blockchain Corporation (LBCC). What does iced tea have to do with blockchain, you may ask? The answer appears to be: absolutely nothing.

However, the company announced on December 21 last year that it was pivoting the business from tea brewing and distribution to “exploration of and investment in opportunities that leverage the benefits of blockchain technology.” The news sent investors into a frenzy, and the firm’s share price skyrocketed 245% higher in a single day. Fees spiked, and utilization quickly reached 100%, suggesting that securities lending market participants were taking a dim view of this change in business focus.

In a similar case, Longfin Financial (LFIN) became another very hot stock after the company acquired Ziddu.com, a micro-finance business lending firm for import/export businesses using “Ziddu coins,” which are collateralized by warehouse receipts. After LFIN’s stock price skyrocketed by 2,000% in late December, the CEO Venkat Meenavalli announced that the company’s sudden $3.8 billion market cap was “not justified.” The securities lending market certainly agreed with that sentiment as fees soared by the end of the year, with just about every share of available stock on loan. Considering that Meenavalli was also a majority stakeholder of Ziddu.com, the market may also have had some self-dealing concerns regarding the merger.

Riot Blockchain (RIOT) is another born-again blockchain company commanding very high fees. Previously known as Bioptix, a biotech firm specializing in diagnostic equipment, the company transformed itself in October 2017 when it invested in Coinsquare Ltd and announced a name change, purporting to offer “targeted investments” in the “blockchain ecosystem.” This caused the stock price to jump, and fees and utilization quickly followed suit. The securities lending market may be questioning this company’s business model shift.

Mobile payment solution company Net Element (NETE) also waded into the blockchain frenzy in late December 2017 when it announced the launch of a Bitcoin business unit, sending the stock 144% higher in a day. While the stock has sold off a bit since then, fees and utilization remain very high.

Power solutions manufacturer DWP Holdings (DWP) was another beneficiary of blockchain exuberance when it launched a new line of power systems designed to keep power costs down for “miners” of cryptocurrencies. According to a recent New York Times article, creating a single Bitcoin token requires at least as much electricity as an average American home consumes in two years, so the electricity costs associated with “mining” cryptocurrencies can be a real concern. This news, combined with rumors that Amazon was interested in purchasing hardware companies associated with cryptocurrency mining, sent DWP’s price soaring. Just as in previous examples, the securities lending market reacted immediately, and lending fees skyrocketed in December before settling back down to less incendiary levels.

Then in early January, previously sleepy Eastman Kodak Co. (KODK) launched KODAKCoin, a solution that helps photographers receive payments for the use of their licensed images. Shares of the company almost tripled overnight, while fees and utilization escalated the next day. With a utilization just short of 100%, the securities lending market would suggest there is some excess ebullience in this name.

Those six securities have grossed agent lenders almost $3 million since they became “born again” as blockchain stocks late last year. Other examples of companies capitalizing on the recent success of the cryptocurrency and blockchain bullishness include Seven Stars Cloud Group (SSC), Social Reality Inc (SRAX), On Track Innovations (OTIV), Pareteum Corp (TEUM), Hive Blockchain Technologies (HIVE CN), Marathon Patent Group (MARA) and Bitcoin Services Inc. (BTSC), just to name a few. (Note that the metrics provided in this article reflect lender-to-broker activity only; broker-to-broker fees trade even higher in these names as agent lender supply is all but exhausted in this space as of this writing.)

The fees and utilizations associated with many of these companies suggest that at least some in the securities lending market view these blockchain “solutions” as pure vaporware. Other challenges stem from increased calls to regulate this space. 

The U.S. Securities and Exchange Commission is looking closely at the disclosures of public companies that shift their business models to capitalize on the perceived promise of distributed ledger technology and whether the disclosures comply with securities laws. Recent headlines in this space have also given reasons for investors to pause, such as the total collapse of the Bitconnect Exchange, or the theft of hundreds of millions of dollars worth of cryptocurrency from the Coincheck exchange.

There is no question that blockchain has amazing potential as a transformative technology across a myriad of industries, and there are plenty of seasoned technology companies ready to unleash this potential. 

But much like the dot-com days of the 1990s, just adding the word “blockchain” to a company’s name does not make for a sustainable business model. In time, surely, the market will separate the blockchain winners from the losers.