Seeing Through The Hype And Gimmicks

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Includes: BKC, CSCO, FB, LAZ
by: REX Shares, LLC

Summary

I think 90% of initial coin offerings (ICOs) could go to zero.

Just because it’s too early now, or the tech isn’t ready now, that doesn’t mean it never will be.

The most viable crypto-blockchain opportunities may be in the backbone technologies.

Blockchain Money Grabs Recall The 90s Internet Bubble: “Déjà Vu All Over Again”

After the recent “Money 2020” payments conference in Amsterdam, a CNBC colleague, Arjun Kharpal, wrote that he overheard one conference delegate telling another, “Let's just call it a blockchain1 anyway, we'll get funding.” That same day, Forbes published a piece re-visiting “blockchain” stocks, pointing out that even if calling something blockchain might bump a company’s stock price for a few weeks, it seldom lasts if the initiative is just a fig leaf.

For those of us who cut our teeth during the technology bubble of the 1990s, this sounds awfully familiar. In those days, simply launching a website could boost a company’s stock, even if the website didn’t do anything. Today, that notion sounds quaint. But back then, launching a website sounded like a big deal because hardly anybody knew what a website was, or what it was supposed to do.

We know better today, and there are two ideas I’d suggest that people remember when trying to sort the hype, gimmicks, and money grabs from the real opportunities in crypto2 and blockchain:

First is that most crypto-blockchain initiatives will likely fail. I’ve said it before publicly: in my view, 90% of initial coin offerings (ICOS) will probably go to zero. That shouldn’t be surprising, given that 90% of venture start-ups don’t pan out. It’s just a handful of companies, out of hundreds, or even thousands, that go on to become the next Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), or Netflix (NASDAQ:NFLX).

Failure rates are likely to be high because many of today’s crypto-blockchain ideas are just too early, or they lack an addressable market, or the technology isn’t ready, or management doesn’t have the execution chops to build a viable business.

But that brings us to idea number two: Just because it’s too early now, or the tech isn’t ready now, that doesn’t mean it never will be. People love to joke about the now-deceased Pets.com as emblematic of the speculative tech bubble of the 1990s.

Consider that Chwey.com (a company with the same business model, product line up, and strategy) just pulled in a $1 billion private equity investment for just 20% of the company. That’s a $5 billion valuation for a business model that would have gone bankrupt (and did) back in 2000.

U.S. Tempting The Currency Fates?

Put this news in a similar category of “too early but not out of the question”: the Chief Executive Officer of Lazard (LAZ), Ken Jacobs, made some eyebrow-raising comments a couple of weeks ago that America’s new unilateralism is “tempting the world” to find an alternative to the U.S. dollar as a reserve currency. He said that it’s unlikely in the near term, and I would agree, but he specifically mentioned cryptocurrencies as a reserve currency alternative.

While it’s not practical today, with a little imagination, as Jacobs suggests, one can see the possibilities for a digital reserve currency, as well as the macroeconomic shifts that could get us there.

The U.S. is currently running twin deficits – budget and trade deficits. Today, they are working together to support our status as the world’s reserve currency. Countries that accumulate dollars through trade invest those dollars back into U.S. government debt. But if tariffs and other measures crimp global trade, then our trading partners will have fewer dollars to buy our debt. This could happen just at a time that the U.S. needs to issue mountains of debt to finance an exploding budget deficit. At that point, trade and budget deficits may no longer work together. Those particular dynamics - falling investment combined with growing debt - are the recipe for the kind of acute crises we have seen unfold many times, especially in the developing world.

Moreover, for the first time the world now has an alternative to gold: Bitcoin. Using a supranational currency standard offers a technology solution to nations fleeing a reserve currency vulnerable to unreliable trade policies, disinvestment, and growing debt problems.

What Does My 2 Cents Add Up To?

This post could have a different title: “What a difference a few decades can make.”

With emerging technologies, a big part of the recipe for success is: Right place. Right time. Right tech. Don’t forget that Bitcoin is not the world’s first digital currency. We had HashCash, Nick Szabo’s Bitgold and other iterations before Bitcoin. The difference with Bitcoin is that I believe it solves the problems of digital currency better; the market is ready to embrace and use it; and technology has advanced far enough to support it.

So how does one tell what’s viable now - in the crypto-blockchain world - instead of what might be viable 20 or 30 years from now?

My approach is to look for companies that: 1) solve a real world problem; 2) solve a problem that could not be solved prior to crypto-blockchain existing; and 3) have the ability to execute on the vision, not just the tech vision, but also the business case.

Today, those look like infrastructure plays. That is, any technology offering a platform for others to build on top of. We are looking for foundational protocols that will fuel the next generation of applications across the decentralized web. If I were to make an analogy to the early days of the Internet: I’d be looking for the Ciscos (CSCO) of the world, not the Facebooks (FB). People could not get online to use something like Facebook until we had enough routers to support that kind of traffic.

Today, in my view, the most viable crypto-blockchain opportunities are in the backbone technologies. Just remember that naming something “blockchain” or “crypto” doesn’t automatically make it a viable business, and even if it’s a good idea in principle, a viable market and business model might still be decades away.

Disclosure: I am/we are long BKC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This blog is intended for information purposes only and does not constitute investment advice. This blog contains the opinions of Brian Kelly. Blockchain technology and cryptocurrencies are subject to several risks which should be considered when evaluating an investment that provides exposure to this sector. The Rex BKCM ETF is not suitable for all investors. The Fund should only be utilized by investors who are willing to assume a high degree of risk and intend to actively monitor and manage their investments in the Fund. Please see important risk disclosures at the bottom of the page.

1 Blockchain is a decentralized, digitally disseminated ledger of data. The basis of a successful blockchain system is once a new group of information, or “block”, is added, the information automatically disseminates and is downloaded to each computer on the network. This assures that a single computer could not change information on a block: it would be overruled by a consensus of all the other computers on the network. This process renders all information on a completed block decentralized and theoretically permanent.

2 A cryptocurrency (crypto) is a digital currency typically utilizing a Blockchain system for transaction records and cryptography for security. The major differentiator from physical currency is it isn’t issued by a central authority and thus theoretically acts independently of traditional banking and government influence. A crypto-asset would be holding a certain amount of cryptocurrency, or a derivative for which value is driven by the price of an underlying cryptocurrency.

3 For description of acronyms and departments visit the U.S. Emerging Citizen Technology Atlas webpage: emerging.digital.gov/...

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