The crypto collapse has made Blockchain a dirty word. Bitcoin miner Riot Blockchain Inc., once the poster child for rebranding designed to capture the investment zeitgeist, now wants to be known as Riot Platforms after a nearly 90% share price drop in 2022. It’s a symbolic moment that testifies to the shift of the B-word to curse from blessing in the stock market, where investors have fallen victim to misguided euphoria and inability to deliver viable business models. And if there’s one safe bet in 2023, it’s that Riot won’t be the last company to change tack.
Crypto Crash Makes Blockchain a Dirty Word
Given the scale of the FTX collapse, it’s easy to overlook just how all-consuming the broader financial sinkhole of cryptocurrency and blockchain investment has been, with new listings and blockchain-fixing of existing companies offering more hype than substance. The proliferation of blockchain-driven company name changes goes beyond Riot — known as Bioptix Inc. until its pivot to crypto in 2017 — and should ring alarm bells, with nine firms adopting the words “blockchain” or “crypto” or “NFT” most recently. year, including digital advertising firm NFTY SA and battery technology firm CryptoBlox Technologies Inc. That’s the most since 2018, when 24 firms granted crypto handles, according to data compiled by Bloomberg. There is a broad similarity to the adoption of the word “dotcom” during the technology boom of the 1990s.
These firms are often the size of penny stocks and volatile. Not everyone survived 2022. Some even saw the sense in dropping crypto from their pre-Riot designations: Data center firm Applied Blockchain became Applied Digital Corp. in November when it began chasing customers outside the battered crypto space. Crypto stocks, flush with access to hot capital, tend to mirror the waves of digital assets; a 2021 research paper analyzing a basket of companies with new crypto- or blockchain-y names identified a trend of declining short-term profitability and an increase in volatility.
Beyond the nomenclature associations, there are fundamental business issues that are clear from stocks that have a longer history than a few months of “going crypto.” Many stocks that offer investors a ride on the crypto wave as agnostic “pick-and-shovel” plays rather than direct management of tokens have either broken down or been hit hard. London-listed developer On-Line Blockchain Plc, which saw a 394% increase in its share price when it added the B-word to its name in 2017, is now warning about its ability to continue as a going concern.
Crypto miners like Riot show that minting virtual currencies is a risky and capital-intensive industry, exposed to volatile assets. Crypto miners that once produced dollars per day are generating cents and are being dumped at a loss, with high energy prices contributing to a multi-billion dollar debt load. As for digital exchange Coinbase Inc., which is set to go public in 2021, its once-impressive transaction fees now look hopelessly dependent on yesterday’s mix of addictive retail speculation and benign regulation; the exchange’s 2021 revenue of about $8 billion is likely to have been halved by 2022.
Other business models have fared no better, regardless of name. The extreme approach of MicroStrategy Inc. to staunchly “HODL” Bitcoin as a supposed value and inflation hedge has been proven wrong as rising prices reveal the virtual currency’s lack of intrinsic value. The firm, whose shares are down 90% from their 2021 peak, is only now selling Bitcoin at a loss in hopes of lowering its tax bill. It’s a strategy that has spawned few imitators; Elon Musk’s Tesla Inc., which briefly flagged the mistaken view of Bitcoin as “digital gold,” sold most of its holdings in July.
As for corporate visions of a deep-rooted technological improvement in payments or financial industry plumbing, they too have flopped as crypto’s volatility makes it a poor medium of exchange and as distributed ledgers present their own cost-benefit issues. Intercontinental Exchange Inc. recently wrote down the value of its stake in crypto-payments platform Bakkt Holdings Inc., which has consumer-centric partnerships with Starbucks Corp. and Mastercard Inc., with $1.1 billion. On the infrastructure side, insurance blockchain venture B3i Services AG filed for insolvency last year, while the chairman of Australian stock exchange ASX Ltd. recently apologized for its own failed and abandoned multi-million dollar blockchain rollout.
Crypto lovers will hope that this is just another winter in a world known for booms, with spring just around the corner. Even Riot Platforms says it still hopes to become “the world’s leading Bitcoin-powered infrastructure platform.” Consolidation and restructuring are already taking place, with BlackRock Inc. and Galaxy Digital Holdings Ltd. among those issuing loans to the distressed digital mining sector. Central banks, meanwhile, are planning their own digital currencies, which could one day be the key that unlocks healthier forms of virtual assets.
But the winters are getting longer and the summers shorter. Many crypto companies now have five-year histories of volatile performance and value destruction, sometimes underperforming the underlying digital currencies themselves. Their future in a world of rising interest rates, where much safer investments will begin to yield decent returns, does not look brighter. Given the dubious business case behind some flashy crypto names, regulators and investors will be on guard. The next trend in blockchain land is to get rid of the word – Riot is on to something.
More from Bloomberg Opinion:
• Beware the dangers of too much crypto regulation: Tyler Cowen
• Navigating 2023 with seven maps and a cat: Ashworth & Gilbert
• Beware of crypto-billionaires who brag about audits: Lionel Laurent
This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the EU and France. Previously, he was a reporter for Reuters and Forbes.
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