Here’s How To Invest In Blockchain Without Getting Slaughtered When The Bubble Bursts

January 2, 2018

Here’s How To Invest In Blockchain Without Getting Slaughtered When The Bubble Bursts

  • Blockchain is hot at the moment, but there are many companies trying to take advantage of inexperienced investors.
  • Remember, pigs get fat, hogs get slaughtered.
  • However, there is a way to invest in blockchain with less risk and high upside.


In the dot-com era, it was enough for a company to add the prefix “e” or the suffix “com” to its name to enjoy a huge spike in its stock price. Things aren’t that different now as when a company adds the word “blockchain” to its name, it can expect a lot of attention.

A microcap beverage producer, Long Island Iced Tea, recently changed its name to Long Blockchain Corp. (NASDAQ: LTEA) and enjoyed a 129% stock price jump in a matter of days even though the company says it’s just exploring blockchain investing options.

Figure 1: Long Blockchain Corp’s stock price in the last month. Source: CNN Money.

The only explanation for such a move is blockchain exuberance, but we can’t say there is no hype. The idea behind the blockchain technology is that it will revolutionize the way financial and other transactions are made.

Figure 2: Hopes of blockchain bulls. Source: Hive Blockchain.

It isn’t unusual for the market to become infatuated with a sector. Just a few years ago, many were crazy about 3D printing and now you almost never hear about it. This is because it takes time for every new technology to really gain market exposure and to really be used.

Adoption may be quick, but investing in the early stages is mostly about sentiment. It took more than 10 years for us to really see the winners form the 1990s dot-com craze. We can expect something similar from blockchain technology as it’s highly unlikely for anyone to make healthy and sustainable profits from creating blockchain technology applications anytime soon. Nevertheless, there is a lot of buzz and there will definitely be opportunities. But be careful and remember that pigs get fat and hogs get slaughtered.

One way to make money is through cryptocurrencies and investing in them, but I think the only ones who will make money are those who issue new coins as the coin issuance market exploded in 2017.

Figure 3: The number of cryptocurrencies doubled in just a year. Source: Hive Blockchain.

Apart from initial coin offerings that are promoted around every corner, there are more sophisticated ways to make money without the risk. Hive Blockchain, a Canadian coin miner, is doing just that and with no risk. Let me show you how this is done.

Hive Blockchain

A bigger company, in this case Genesis Mining, sold its mining facility to Hive Blockchain (TSX: HIVE; OTC: PRELF) for $9 million where HIVE issues shares. This allows HIVE to show growth and attract new investors with a private placement of C$15 million and the promise of going public. Further financing rounds occurred and Genesis even invested C$7  million into the company, but not even two weeks later it received US$22 million for another mining facility. A rising stock price allowed for a new round of financing and a new deal with Genesis where HIVE purchased another mining facility and payed Genesis to expand it. Just to make things look legit, Genesis bought another C$5.1 million in the last financing round.

To quickly sum things up, Genesis invested C$12.1 million into the company but has already pulled out more than $31 million.

Figure 4: Lots of transactions between related companies. Source: Hive Blockchain.

That is how you put all the risk in the hands of new shareholders (Hive Blockchain) and how you totally de-risk your mining operations as you get immediate cash (Genesis). If cryptocurrencies fall, the owners of Genesis will have their cash and the owners of Hive will have nothing. If those mining facilities became so valuable, why would you ever sell them?

Another interesting thing is that Hive Blockchain says it doesn’t need to sell their mined coins immediately. However, the 500,000 coins it has would create significant pressure on its main coin market, Ethereum, so it could also be the case that they can’t sell their coins without significantly impacting the market.

Figure 5: Hive’s coin inventory. Source: Hive Blockchain.

What’s interesting is that a company that has $130 million in coin inventory with questionable resale value and a parent company that is taking as much cash out as possible, manages to have a C$815 million market capitalization.

Figure 6: HIVE’s stock price went from C$0.1 to the current $3.4 in less than 12 months. Source: Google.

If you know how to take advantage of the short term stock price moves, then take advantage, but the majority of investors investing in such schemes should know they could really end up like hogs.

Gain Capital

Gain Capital (NYSE: GCAP) is a company that owns a FOREX trading platform. Since December, it has enabled its users in the UK to trade bitcoin on its platform.

Needless to say, since the stock got on the radar of blockchain investors, it has jumped more than 30%.

Figure 7: GCAP’s stock price in the last month. Source: CNN Money.

No trading reports have yet been issued, but the stock has reacted well. I don’t know what the trading commission that GCAP might get will be from its bitcoin trading platform, but seeing that it’s one of many platforms, it might not really have an impact on GCAP’s bottom line. Nevertheless, this is another way to invest in the blockchain craze, perhaps with a bit more integrity than HIVE.

Xinyuan Real Estate

The third option to invest in blockchain, and one with the least risk, is to invest in a company that is busy with blockchain but isn’t even promoting it as it’s a minor part of the company’s business.

Xinyuan Real Estate (NYSE: XIN) is a Chinese real estate developer that has a foot in the blockchain industry. A year and a have ago, XIN had some blockchain-powered real estate financing deals done and now it owns a blockchain technology company that will spread the technology in China.

Figure 8: XIN’s blockchain deal. Source: Newswire.

Now, the difference between the three companies is that HIVE depends on blockchain, GCAP is marketing it to push its stock price higher, while XIN isn’t even mentioning it publicly.

The total revenue exposure for HIVE is 100%, while for GCAP and XIN it will be less than 1%. Needless to say, GCAP and XIN, which are profitable companies paying a dividend, have a market capitalization that is half of HIVE’s. That’s just how the world works today.

If you really have to be exposed to blockchain, invest in a company where you won’t lose anything when the bubble bursts. All else is just short-term speculation, so be careful not to become a hog for slaughter.

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