Bitcoin Bubble Hits Stock Market
Before we get started today, I’d appreciate it if you indulge me in a game called: “Which of these is not like the other?”
Here are six stock charts that all look pretty similar. Five of them share a common connection. One does not. Can you guess which it is?
If you picked chart C, congratulations! You’re a winner!
That’s a chart of the Nasdaq Composite Index in the run-up to and during the dot-com bubble.
The others are all from stocks in a bubble that’s just gaining steam in the stock market: the blockchain bubble (or Bitcoin bubble).
The Way of the Future
Over the past year or so, the mania surrounding cryptocurrencies and Bitcoin in particular reached a frenzied pace. And like most bubbles, it’s driven mostly by amateur investors. These are people who are convinced there’s nowhere for crypto prices to go but up.
And they’re also largely uninformed or uneducated about investing. They’re not considering intrinsic value. When it comes to these cryptocurrencies, there is none. The value is entirely in how much someone else is willing to pay for them.
Now, ask any of these investors, and they’ll tell you the intrinsic value is found in the technology behind the coins: blockchain. And while it is true that blockchain is a valuable new technology, it’s 100% false to assume you’ve got a stake in blockchain technology because you own some of the coins that use it.
It seems investors are starting to realize this. And it’s leading to the Bitcoin bubble making its way into the stock market. If you’re not investing in blockchain technology when you buy these digital coins, then you can invest in it by buying shares of a company that’s working on new ways to implement the tech.
But what is blockchain really? When you get right down to it, the easiest way to explain the technology is that it’s a very detailed and incredibly accurate way to keep track of things.
Imagine there’s a list of every single Bitcoin transaction ever made. But there are millions of copies of that list. Now, every time a new transaction comes along, all of those millions of lists are checked to make sure the transaction is legitimate. Then, all at the same time, every one of those millions of lists gets updated to include the new transaction.
There’s no way to fake a transaction (at least not with current technology). So, the record of all those transactions is as accurate as possible. There’s no question as to whether those transactions actually happened. There’s no question as to who currently owns the coins or who owned them in the past. And if a question arises, there are millions of identical lists to use to verify whatever transaction is in question.
That kind of accuracy just doesn’t exist outside of blockchain. And it’s going to revolutionize the way we do nearly everything... just like the internet changed our lives in the late 1990s.
But, just like the internet revolution of the late ’90s, until a better understanding of the technology and its potential applications comes to light, there are going to be stocks that go parabolic simply because they add the word “blockchain” to their name or company profile.
And it’s already happening…
The Bitcoin Investment Trust ETF is just a fund that owns bitcoins and sells shares to investors. So, it should be pretty easy to determine its stock price, right? We just take the number of coins it owns and multiply that by the current price of a Bitcoin. Then we take that number, divide by the shares outstanding, and viola, we’ve got the share price.
As of July 31, 2017, the trust owned 173,014 bitcoins. At that time, each coin was worth $4,383. So, the net asset value of the fund was $758.3 million. But the shares were trading much higher than that. The fund had a market cap of $1.29 billion.
That’s 70% more than all the coins were actually worth!
If you think that’s crazy, just wait until you get a look at First Bitcoin Capital’s charts.
First, you should know that as recently as four years ago, First Bitcoin was a precious metals miner. And its only assets as of December 2015 were $360,000 worth of gold concessions in Venezuela and $2,233 in cash.
It had accumulated losses of $3.25 million and revenue of $46,236 per year.
Now, it describes itself as a company that develops digital currencies and blockchain technology and operates cryptocurrency exchanges. Before the SEC halted trading back in August of 2017, it had an intraday market cap of nearly $1 billion!
It went from a miner that traded for less than half a penny per share to a Bitcoin behemoth worth almost $1 billion in a year — a 64,186% gain! And from a company with barely any assets, mounting losses, and no SEC filings in over two years.
Stay on top of the hottest investment ideas before they hit Wall Street. Sign up for the Wealth Daily newsletter below. You'll also get our free report, "Seven Techincal Analysis Tools for Investors."
New Kids on the Blockchain
But that wasn’t the end. After the SEC and FTC cracked down on Bitcoin-related investments, companies started using the building blockchain mania to drive prices higher.
Just last month, I watched as three companies skyrocketed a combined 3,052% in a matter of weeks — one in a matter of days — as their names or profiles added the word “blockchain.”
First, it was Riot Blockchain (NASDAQ: RIOT). Up until October of last year, Riot was a biotech company called Bioptix, Inc. It made diagnostic machinery for the biotech industry. And it traded in the $3–$4 range. But that was after three reverse stock splits in the past five years to get the price higher.
By December 19, 2017, shares hit highs of $46.20. What happened? The company announced that it was investing in cryptocurrency-related businesses. That was enough to drive the stock up 1,259%.
Impressive, right? Kind of like all those companies that added a “dot-com” to their names back in the 1990s and added millions to their market cap overnight.
Need another example? I’ve got two.
Next to ride a massive blockchain bubble rally was a financial solutions company that IPO’d on December 13th to lackluster demand. The company, Longfin Corp. (NASDAQ: LFIN), specialized in offering foreign exchange and financing solutions to small businesses.
But two days after going public, it announced ties to a cryptocurrency and blockchain outfit called Ziddu.com. And shares went ballistic! Within two days, the stock was up 1,443% from the IPO…
Now, you should know something about Ziddu.com. It burned through about 90% of its capital in under a year on mounting losses. And the "coin" it created isn't even a real cryptocurrency. It’s not worth even close to the $7 billion that was added to LFIN’s market cap during the buying frenzy.
But wait, it gets even better. A few days later, Long Island Iced Tea (NASDAQ: LTEA) changed its name to Long Blockchain Corp. And shares jumped from $2 to nearly $7.
This company literally makes iced tea, people! And lemonade. Iced tea and lemonade. That’s it.
But now, it also focuses on developing and investing in blockchain technology. And it’s called Long Blockchain. So, it’s worth 350% more. Makes perfect sense, right?
Surviving the Fallout
Now, like I said at the start, just like the internet, blockchain technology is going to be game-changing. But, just like the internet, we’re going to see a lot of companies changing names and pumping up their prices thanks to the mounting frenzy to buy anything blockchain-related.
Sure, they’ll all tell us it’s different this time. They’re not just taking advantage of the mania surrounding blockchain and cryptocurrencies to drive stock prices up. As Jeff Koyen (former freelance journalist and now advisor to 360 Blockchain) says, they’re “focused on finding great, solid companies working in what [they] see as ground-breaking technology.”
Sure you are, Jeff. You’re not just riding a wave of interest and buying up 300% by changing the name of your company from 360 Capital Financial to 360 Blockchain.
Neither is that iced tea company. Or the consulting firm. Or the gold miner.
In fact, that’s exactly what 90% of these companies are doing. And it’s going to get worse before it gets better. So, the trick as an investor is to ride these waves to the top and not get caught when the bottom falls out.
Billions were made during the dot-com bubble. Billions will be made during the blockchain one, too. You’ve just got to make sure you’re not on the losing side when it all goes south.
One way to do that is to set a profit target and sell once you’ve reached it. Another is to take half of your investment out once you hit 100% gains — that way you’re playing with won money instead of earned money.
The third way to make sure you’re not holding the bag when the music stops is to pick companies that are worth investing in with or without blockchain. Even better, picking solid investments that could actually benefit from blockchain technology, and ones that have the technical know-how to take advantage of the technology.
My colleague Briton Ryle and I are convinced we’ve found just such a company. It’s a solid investment on its own. And it’s just started branching out into blockchain technology. Plus, that tech could provide massive benefits to the type of business the company is already involved in.
We’re announcing the stock to readers of The Wealth Advisory next week, so I can’t give it away here. But if you’re interested in learning more, you can sign up for the service by clicking this link. You’ll get next week’s recommendation, plus access to reports on all our other successful current investments.
To riding the wave until it breaks,
After graduating Cum Laude in finance and economics, Jason analyzed complex projects and budgets for the U.S. Army. Then, at Morgan Stanley, he led the assistants' team for the North American repo sales desk, responsible for hundreds of multibillion-dollar trades every day. Jason is the assistant editor for The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
The Best Free Investment You'll Ever Make
After getting your report, you’ll begin receiving the Wealth Daily e-Letter, delivered to your inbox daily.