Given the scale of the FTX collapse, it’s easy to overlook just how pervasive the broader economic hole in cryptocurrency and blockchain investment has been, with new listings and the blockchain-ification of existing companies offering more hype than substance. The prevalence of blockchain-fueled corporate name changes goes beyond Riot — known as Bioptix Inc. to its move to crypto in 2017 — and should ring alarm bells, with nine companies the latest to adopt the words “blockchain,” “crypto,” or “NFT.” including digital advertising company NFTY SA and battery technology company CryptoBlox Technologies Inc. That’s the most since 2018, when 24 companies adopted 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 companies are often the size of small stocks and are volatile. Not everyone survived 2022. Some even saw sense in dropping crypto from their names before Riot: data center company Applied Blockchain became Applied Digital Corp. in November when it began chasing buyers out of the battered crypto space. Crypto stocks, buoyed by access to hot capital, tend to mirror declines in digital assets; one 2021 research paper analyzing a basket of companies with new crypto or blockchain-y names identified a trend of declining short-term profitability and increasing volatility.
Beyond the nomenclatural associations, there are fundamental business issues that are clear from stocks that have a history longer than a few months of “going crypto.” Many stocks that offer investors a ride on the cryptocurrency wave as agnostic “picks and shovels” plays rather than direct token handling have either failed or taken a serious beating. London-listed developer On-Line Blockchain Plc, which saw its share price rise 394% 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 virtual currency mining is a risky and capital-intensive industry, exposed to volatile assets. Crypto mining machines that once produced dollars a day are generating cents and disappearing at a loss, and high energy prices are adding to multibillion dollar debts. As for digital exchange Coinbase Inc., which is set to go public in 2021, its once-impressive transaction fees now seem hopelessly dependent on yesterday’s mix of contagious retail speculation and benign regulation; the stock market’s 2021 revenue of around $8 billion is likely to be halved in 2022.
Other business models, regardless of their names, did not fare better. The extreme approach of MicroStrategy Inc. to faithfully “HODL” Bitcoin as a supposed store of value and hedge against inflation has been proven wrong as rising rates reveal the virtual currency’s lack of intrinsic value. The company, whose shares are down 90% from their 2021 peak, is only now selling Bitcoin at a loss in hopes of reducing its tax bill. It’s a strategy that has spawned several imitators; The company Tesla Inc. Elon Musk, who briefly flew the flag for mistaking Bitcoin as “digital gold,” sold most of his stock in July.
As for corporate visions of deep-rooted technological improvement in payments or the installation of the financial industry, they have also failed because the volatility of cryptocurrency makes them a poor medium of exchange and because distributed ledgers bring their own questions of cost and utility. Intercontinental Exchange Inc. recently cut the value of its stake in crypto-payments platform Bakkt Holdings Inc., which has consumer-focused partnerships with Starbucks Corp. and Mastercard Inc., for $1.1 billion. On the infrastructure front, blockchain insurance venture B3i Services AG filed for insolvency last year, while the chairman of Australia’s ASX Ltd. recently told of his own failed and abandoned multi-million dollar blockchain rollout.
Cryptocurrency enthusiasts will be hoping this is just another winter in a boom-and-bust world, with spring just around the corner. Even Riot Platforms says it still hopes to become “the world’s leading Bitcoin-driven infrastructure platform”. Consolidation and restructuring are already underway, with BlackRock Inc. and Galaxy Digital Holdings Ltd. among those issuing loans to the struggling digital mining sector. Central banks, meanwhile, are coming up with their own digital currencies, which could one day be the key to unlocking healthier forms of virtual assets.
But the winters are getting longer and the summers shorter. Many crypto companies now have a five-year track record of volatile performance and value destruction, sometimes weaker than the underlying digital currencies themselves. Their future in a world of rising interest rates, where much safer investments will begin to offer decent returns, does not look any brighter. Given the dubious business case behind some flashy crypto names, regulators and investors will be wary. The next trend in blockchain land is getting the word out — Riot is on to something.
More from Bloomberg Opinion:
• Beware of 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 editorial board or of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Opinion columnist covering digital currencies, the European Union and France. He was previously a reporter for Reuters and Forbes.
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