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Given the scale of the FTX collapse, it’s easy to miss how all-consuming the wider economic sinkhole of cryptocurrency and blockchain investments is. Blockchainization of new listings and existing companies offers more hype than substance. Riot has been surpassed and alarm bells should be sounded. This is the most since 24 companies allocated cryptocurrency handles in 2018, according to data compiled by Bloomberg. Adopted during the 1990s technology boom, the term “dotcom” bears a striking parallel.
These companies are often penny stock sized and volatile. Not all survived his 2022. Before Riot, some even understood the implications of removing cryptocurrencies from their names. Crypto stocks strengthened by access to hot capital tend to reflect surges in digital assets. A 2021 research paper analyzed a basket of companies with new cryptocurrency or blockchain-like names and identified trends toward lower short-term profitability and higher volatility.
Beyond nomenclature relevance, there are fundamental business issues evident from stocks with a history longer than a few months of “going cryptocurrency”. Many stocks that offer investors to ride the crypto wave as an agnostic “pick and shovel” play rather than directly dealing with tokens have gone bankrupt or been beaten enough. London-listed developer On-Line Blockchain Plc, whose share price rose 394% after adding the B-word to its name in 2017, has issued a warning about its ability to continue as a going concern.
Crypto miners such as Riot show that crypto mining is a risky and capital-intensive industry, exposed to volatile assets. Cryptocurrency mining machines that once produced dollars per day are now producing cents and dumping at a loss, with high energy prices adding to billions of dollars of debt burden. As for digital exchange Coinbase Inc., which will go public in 2021, its once-impressive trading fees are hopelessly dependent on yesterday’s combination of addictive retail speculation and harmless regulation. I can see it. His 2021 revenue on the exchange is about $8 billion, which could be halved in 2022.
Other business models, regardless of their name, have failed. MicroStrategy Inc.’s extreme approach to faithfully ‘HODL’ Bitcoin, which is supposed to be a store of value and an inflation hedge, is wrong because rising interest rates expose the virtual currency’s lack of intrinsic value. is proven. Peak is just selling Bitcoin at a loss in hopes of lowering taxes. This is a strategy that has spawned several imitators. Elon Musk-led Tesla sold most of its holdings in July after briefly flagging it for mistaking Bitcoin for “digital gold.”
When it comes to corporate visions of deep-seated technological improvements in payments and the plumbing of the financial industry, they too have failed as the volatility of cryptocurrencies makes them poor mediums of exchange and distributed ledgers bring their own issues of cost and utility. Intercontinental Exchange recently devalued Bakkt Holdings, a crypto payment platform that has consumer-centric partnerships with Starbucks and Mastercard, by $1.1 billion. On the infrastructure side, insurance blockchain venture B3i Services AG filed for bankruptcy last year and the chairman of Australian stock exchange ASX Ltd. recently apologized for failing and abandoning a multi-million dollar blockchain deployment. .
In a world known for booms and busts, cryptocurrency enthusiasts hope that spring is just around the corner and that this will be another winter. Even Riot Platforms says it wants to become “the world’s leading Bitcoin-driven infrastructure platform.” Consolidations and restructurings have already taken place, with the likes of BlackRock and Galaxy Digital Holdings lending money to their struggling digital mining divisions. Meanwhile, central banks are planning their own digital currencies. This could one day be the key to unlocking a healthier form of virtual assets.
But winters are longer and summers are shorter. Many cryptocurrency companies now have his five-year track record of volatile performance and value destruction, sometimes underperforming the underlying digital currency itself. Their future does not look bright in a world of rising interest rates, where safer investments start to offer decent returns. Given the questionable business case behind some fancy crypto names, regulators and investors will be on high alert. It is working.
Bloomberg Opinion Details:
• Beware of the dangers of too much cryptocurrency regulation: Tyler Cowen
• Navigating 2023 with 7 Charts and Cats: Ashworth & Gilbert
• Beware of crypto billionaires who brag about audits: Lionel Laurent
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.
More articles like this can be found at bloomberg.com/opinion.
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