Crypto Crash makes Blockchain a dirty word

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The collapse of cryptocurrencies 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 attests to the B—the shift of word to curse from blessing in the stock market, where investors have fallen prey to a misguided euphoria and an inability to deliver viable business models. And if there’s a safe bet in 2023, it’s that Riot won’t be the last company to change course.

Given the scale of the FTX crash, it’s easy to overlook how consuming the wider economic chasm of cryptocurrency and blockchain investing 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. until its move to crypto in 2017, and should ring alarm bells, with nine companies adopting the words “blockchain” or “crypto or “NFT” last year, including digital advertising firm NFTY SA and battery technology company CryptoBlox Technologies Inc. That’s the most since 2018, when 24 companies appropriated cryptographic handles, according to data compiled by Bloomberg. There is a broad similarity to the adoption of the word “dotcom” during the tech boom of the 1990s.

These companies are often the size of a penny stock and volatile. Not everyone survived into 2022. Some even saw the point in dropping cryptocurrencies from their denominations before Riot: Data center firm Applied Blockchain became Applied Digital Corp. in November, when it began chasing customers beyond out of the battered crypto space. Crypto stocks, spurred by access to hot capital, tend to mirror swings in digital assets; a 2021 research paper analyzing a basket of companies with new cryptocurrency or blockchain names identified a trend of declining short-term profitability and an increase in volatility.

Beyond nomenclature associations, there are fundamental business questions 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 while playing agnostic “pick-and-shovels” rather than directly managing tokens have failed or been severely abused. London-listed developer On-Line Blockchain Plc, which saw its share price jump 394% when it added the B-word to its name in 2017, is now warning about its ability to continue operating.

Cryptocurrency miners like Riot demonstrate that the minting of virtual currencies is a risky and capital-intensive industry, exposed to volatile assets. Cryptocurrency mining machines that once produced dollars a day are generating cents and being dumped at a loss, with high energy prices adding to a multibillion-dollar debt load. As for digital exchange Coinbase Inc., which went public in 2021, its once impressive transaction fees now seem hopelessly dependent on yesterday’s mix of compelling retail speculation and benign regulation; the exchange’s 2021 revenue of about $8 billion is likely to have been cut in half in 2022.

Other business models fared no better, regardless of their names. MicroStrategy Inc.’s extreme approach to faithfully “HODLing” Bitcoin as a purported store of value and inflation hedge has proven wrong as rising rates expose the virtual currency’s lack of intrinsic value. peak, it is only now selling Bitcoin at a loss in hopes of lowering its tax burden. It’s a strategy that has spawned few imitators; Elon Musk’s Tesla Inc., which briefly waved the flag over the misconception of Bitcoin as “digital gold,” sold most of its stash in July.

As for corporate visions of a deeply rooted technological improvement in payments or financial sector plumbing, they have also failed as the volatility of cryptocurrencies makes them a poor medium of exchange and as distributed ledgers bring their own cost and money issues. utility. Intercontinental Exchange Inc. recently reduced the value of its stake in cryptocurrency payments platform Bakkt Holdings Inc., which has consumer-focused partnerships with Starbucks Corp. and Mastercard Inc., by $1.1 billion. infrastructure, blockchain insurance firm B3i Services AG filed for insolvency last year, while the chairman of Australian stock exchange ASX Ltd. recently apologized for its botched and abandoned multimillion-dollar blockchain launch.

Crypto enthusiasts are hoping this is just another winter in a world known for booms and busts, with spring just around the corner. Even Riot Platforms says it still hopes to become “the world’s leading Bitcoin-based infrastructure platform.” Consolidation and restructuring is already underway, with BlackRock Inc. and Galaxy Digital Holdings Ltd. among those issuing loans to the struggling digital mining sector. Central banks are meanwhile designing their own digital currencies, which could one day hold the key to unlocking healthier forms of virtual assets.

But winters get longer and summers get shorter. Many cryptocurrency companies now have a five-year track record of volatile performance and value destruction, sometimes underperforming the underlying digital currencies themselves. Their future in a world of rising rates, where much safer investments will begin to offer decent returns, looks no longer rosy. Given the dubious business case behind some flashy cryptocurrency names, regulators and investors will be raising their guard. The next trend in blockchain-land is getting rid of the word: Riot is doing something.

More from Bloomberg’s opinion:

• Beware of the Dangers of Cryptocurrency Overregulation: Tyler Cowen

• Navigate 2023 with seven charts and a cat: Ashworth and Gilbert

• Beware of cryptocurrency 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. Previously, he was a reporter for Reuters and Forbes.

More stories like this can be found at bloomberg.com/opinion

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