Crypto Crash Makes Blockchain a Dirty Word

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The crypto crash has made Blockchain a dirty word. Bitcoin miner Riot Blockchain Inc., once the poster child of rebranding designed to capture the investment zeitgeist, now wants to be known as Riot Platforms after a price drop of the stock by nearly 90% in 2022. It’s a symbolic moment that attests to the B-words shifting to the curse of blessing in the stock market, where investors have fallen prey to misguided euphoria and the inability to provide viable business models. And if there’s one sure bet in 2023, it’s that Riot won’t be the last company to change course.

Given the scale of FTX’s collapse, it’s easy to forget how consuming the larger economic chasm of cryptocurrency and blockchain investing has been, with new listings and blockchain-ification existing businesses offering more hype than substance. The prevalence of blockchain-powered corporate name changes goes beyond Riot known as Bioptix Inc. to its pivot to crypto in 2017 and should raise alarm bells, with nine companies adopting the words blockchain or crypto or NFT last year, including digital advertising firm NFTY SA and battery-tech firm CryptoBloxTechnologies Inc. That’s the most since 2018, when 24 companies took ownership of crypto handles, according to data compiled by Bloomberg. There is a great similarity to the adoption of the word dotcom during the technology boom of the 1990s.

These companies are often penny stock sized and volatile. Not all survived 2022. Some even saw the sense in dropping crypto from their pre-Riot monikers: data center company Applied Blockchain became Applied Digital Corp. in November as it began chasing customers outside of the beaten-up crypto space. Crypto stocks, fueled by access to hot capital, tend to mirror fluctuations in digital assets; a 2021 research paper analyzing a basket of companies with new crypto or blockchain names identified a trend of declining short-term profitability and increasing volatility.

Beyond nomenclature associations, there are fundamental trading issues that are evident in stocks that have a history longer than a few months in crypto. London-listed developer On-Line Blockchain Plc, which secured a 394% increase in share price when it added the B-word to its name in 2017, is now warning of its ability to continue its activity.

Crypto miners such as Riot are showing that minting virtual currencies is a risky and capital-intensive industry exposed to volatile assets. -debt of several billion dollars. 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 addictive retail speculation and benign regulation; exchange revenue in 2021 of around $8 billion would likely have been halved in 2022.

Other business models have not fared any better, regardless of their name. MicroStrategy Inc.’s extreme approach to faithfully HODL Bitcoin as a supposed store of value and hedge against inflation has proven wrong, as rising rates expose virtual currency’s lack of intrinsic value. at a loss in the hope of reducing its tax bill. It’s a strategy that has spawned few imitators; Elon Musks Tesla Inc., which briefly held the flag for the misconception of Bitcoin as digital gold, sold most of its stash in July.

As for corporate visions of technological improvement deeply rooted in payments or the plumbing of the financial industry, they have also failed as the volatility of cryptos makes it a poor medium of exchange and distributed ledgers bring their own problems of cost and utility. Intercontinental Exchange Inc. recently wrote up the value of its stake in crypto payments platform Bakkt Holdings Inc., which has consumer-centric partnerships with Starbucks Corp. and Mastercard Inc., $1.1 billion. On the infrastructure side, insurance blockchain firm B3i Services AG filed for bankruptcy last year, while Australian stock exchange chairman ASX Ltd. recently apologized for its own botched and abandoned multi-million dollar blockchain rollout.

Crypto aficionados are hoping this is just another winter in a world known for its ups and downs, with spring just around the corner. Even Riot Platforms says it still hopes to become the world’s first Bitcoin-based infrastructure platform. Consolidation and restructuring are already underway, with BlackRock Inc. and Galaxy Digital Holdings Ltd. among those lending to the struggling digital mining sector. Meanwhile, central banks are tracing their own digital currencies, which could one day be the key to unlocking healthier forms of virtual assets.

But winters are getting longer and summers are getting shorter. Many crypto companies now have five-year track records 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 start offering decent returns, doesn’t look any brighter. Given the dubious business case behind some flashy crypto names, regulators and investors will be on their toes. Thenextttend in blockchain-land get rid of the word Riots on something.

More from Bloomberg Opinion:

Beware the Dangers of Too Much Crypto Regulation: Tyler Cowen

Navigating 2023 with Seven Maps and a Cat: Ashworth and 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. Previously, he was a reporter for Reuters and Forbes.

More stories like this are available at bloomberg.com/opinion

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