Blockchain Fakes?

While the crypto market is also undergoing some brutal correction, it has become a mainstream topic since last year. There is no lack of blockchain-related news these days and all the sudden, it seems blockchain has become a very fancy name and everyone is chasing it. While blockchain revolution is still in its early stage of infancy, we are already seeing dot.com type of euphoria emerging.  Early this year, we saw a few stocks jumping up 5 times or more overnight simply because they claimed to be doing something with blockchain, although laughably no one could figure out how their underlying business would have anything to do with blockchain.  For example Riot Blockchain (formerly Bioptix) markets biotech diagnostic equipment and then their CEO came up with a genius idea to change their name with blockchain in it that has substantially boosted their share price overnight. Even more bizarre was a Long Island Iced Tea company that changed its name to Long Blockchain to immediately see its stock prices moon-shooting several times up. And then a restaurant company,  Chanticleer announcing a “blockchain” customer loyalty program.  Of course, none of them have anything seriously associated with blockchain and those chasing them should be punished.  In the past few weeks, the reality has hit all of them and their stocks are dropping like stones with -30 to -50% haircut. I bet we will see more down to come for them.

 

Then about three weeks ago, we saw the launch of two blockchain ETFs: Reality Shares Nasdaq NextGen Economy ETF (BLCN) and Amplify Transformational Data Sharing ETF (BLOK). Let me be very clear upfront that I’m not saying these two EFTs are faked in any sense. Actually they are holding some great stocks that I’m also holding. So there is nothing wrong to buy the ETFs if you like the underlying stocks. But the issue for me is how they label them and consider them as blockchain-based ETFs. This to me is very misleading.  Why?

 

The biggest holdings of these ETFs are hot tech stocks like Intel, Microsoft, Nvidia, and Overstock. It is very true that all of them are spending a lot of money into the blockchain technology and will likely benefit from adopting the revolution.  But these companies have so many main businesses that have nothing to do with blockchain and the blockchain is so new in terms of its real life application and utility, it will be years before the blockchain-related business could have any meaningful impact on their revenues. Before that happens, their share prices will only be tied to the performance of their non-blockchain businesses. So buying the ETFs may very well be just like buying some tech ETFs and hardly any real exposure to blockchain yet. You see, right now, all the real blockchain companies are still very young and babyish and none of them are mature enough to issue stock shares. If you really want to get exposed to actual blockchain companies, you got to buy their cryptocoins (similar to the stock shares of a company).  Of course, these ETFs are not exposed to any cryptos, even the crypto gold, bitcoin.  More problematic is their holdings of some financial companies like Barclays, Goldman Sachs, Mastercard etc. You may ask anything wrong for these companies? Certainly not in the foreseeable future as these are also quality companies. But if we are talking about the future of blockchain, then you need to be a visionary  and be able to see what blockchain will eventually do to them. Put yourself in the shores of 10 years ago and think about what Amazon will do to the retailers in 10 years. With what you have already known today, it is very easy to get the right answer, right? This is exactly the type of vision you need to have when talking about blockchain, as it is a powerful disruptive force with much strength as Amazon to many businesses. The most disruptive effect will be to the financial sector.  You see, one of the main bread and butter for banking business is to earn commissions as a middleman for money transactions. We need a bank in between to transfer our money because it is at least reliable to ensure the transaction will be done without cheating between parties. But this is really where the blockchain technology will come in to make a revolutionary change as it allows trustable transactions of any digital assets between peers without a middleman. It may still take a couple of years before this can be widely adopted but it is coming. If the banking industry is not prepared, they will be just like what retailers have been going through in the past few years.  Yes, blockchain could also be beneficial to the financial sector for their cost cutting but they are going to meet some fundamental challenges from the blockchain technology in the years to come. I think we are going to see more and more challenges for the financial stocks moving forward when the BC technology becomes more and more matured and adopted. So keeping banking stocks in the blockchain ETFs now is similar to holding traditional retailer stocks in an e-commerce ETF and it is counterproductive in my mind.

 

Again, if you have bought BLOK or BLCN, I’m not saying there is anything wrong to keep them but just don’t expect to see them as being closely tied to the blockchain revolution, thinking you have got good exposure to the life changing innovation. No, you are not!