We have written this year that the bitcoin mania is very similar to the Internet bubble that burst in March 2000. At that time, everyone wanted to participate in the “.com” bubble as it was called, even those who knew it would badly.
Knowing that our warnings could not keep people away from the latest scams, we advised that if someone wanted to use a very small portion of their capital to really speculate, knowing they might lose it all, we expected the biggest gains in the stocks of companies that had no earnings. Why? Because it was more difficult to put a value on those.
In the final phase in 1999, we said that those looking for a replacement for trip to Las Vegas, we expected even bigger gains in companies that had no earnings and no sales. However, one had to be ready to exit on a moments notice.
Low and behold, those stocks with no sales nor earnings turned out to be the biggest gainers. We remember one that came out at $2.50, and then soared to $998. We personally exited around the $990 level, having bought it over $100.
However, this is not investing. It is pure speculation, with money that you can afford to lose without even worrying about it for five minutes. We have cautioned away from the bitcoin mania, and of course, there are those people who still made good money on it. There are now over 1000 cryptocurrencies, many of which are total scams.
Now we see companies issuing more shares, sold by the insiders, not for corporate purposes. They are no crypto-currency business, just an idea of going into it. One recent one is Long Island Tea company. There are more, described in an excellent article from Wolf Richter below.
This can happen only during the very late stage of a bubble.
It just doesn’t let up. UBI Blockchain Internet, a Hong Kong outfit whose shares trade in the US [UBIA], filed with the SEC to sell an additional 72.3 million shares owned by its executives. In other words, it isn’t selling the shares to raise money for corporate purposes, but to allow its executives, including CEO Tony Liu, to bail out.
This is happening after the company – which sports zero revenues and a disconnected phone number in its SEC filings – managed to get its shares to spike briefly by over 1,100%, pushing its market capitalization to $8 billion.
UBI Blockchain didn’t do an IPO. Instead, in October 2016, it acquired a publicly traded shell company registered in Las Vegas, called “JA Energy.” It then changed the name and ticker symbol to what they’re now.
Over the six trading days starting on December 11, 2017, its shares soared over 1,100%, from $7.20 to $87 on December 18, as the word “blockchain” in its name and sufficient hype and speculator-idiocy took hold. By December 21, shares had plunged 67% to $29. They closed on Wednesday at $38.50. At this price, it still has a ludicrous market cap of $3.64 billion.
In its prospectus for the share sale, filed with the SEC on December 26, UBI explains the overcooked spaghetti of its dreamed-up activities:
UBI Blockchain Internet Ltd. business encompasses the research and application of blockchain technology with a focus on the Internet of things covering areas of food, drugs and healthcare. Management plans to focus its business in the integrated wellness industry, by providing procedures for safety and effectiveness in food and drugs, but also preventing counterfeit or fake food and drugs. With the advancement of the blockchain technology, the Company plans to trace a food or drug product from its original source within the context of the Internet of Things to the final consumer.
It explains that “management is uncertain that the Company can generate sufficient revenues in the next 12-months to sustain our operations. We shall need to seek additional funding to continue our operations and implement our plan of operations.”
It added that “due to the uncertainty of our ability to meet our financial obligations and to pay our liabilities as they become due,” the auditors in the financial statement for the year ended August 31, 2017, questioned “our ability to continue as a going concern.”
For the year, UBI had an operating loss of $1.83 million on zero revenues. It had $15,406 in cash, and: “In order to keep the company operational and fully reporting, management anticipates a burn rate of approximately $220,000 per month, pre and post-offering.”
Without any additional funding, the Company will be unable to operate. Therefore, if we are unable to generate sufficient revenues, we must raise additional capital in order to continue operations in order to implement our plan of operations.
Alas, all of the shares will be sold by existing shareholders. The company “will not receive any proceeds from the sale of the common stock by the selling stockholders.” So even after the sale of the shares, it will have no cash to operate on.
The selling shareholders are the CEO Tony Liu and five other “individuals.” Speculators who buy these shares will hand their money to those individuals – not the company. And the company still has nothing, no revenues, no business model, no cash….
This wasn’t the only outfit to leverage the word “blockchain” to create hype and extract billions from gullible speculators.
There’s Longfin [LFIN]. The company went public in the US on December 13, 2017. In its SEC filing, it said it had revenues of $298,786 in the year 2017 and was sitting on $75 in cash. What sent the stock soaring 2,700%, from $5 to $142.82 in a few days, and gave it briefly a market capitalization of over $7 billion, was the December 15 announcement – an elegant and apparently very effective mix of gobbledygook, hype, and silliness that started out like this:
Longfin Corp., a leading global FinTech company, announces the acquisition of Ziddu.com, a Blockchain-empowered solutions provider that offers Microfinance Lending against Collateralized Warehouse Receipts in the form of Ziddu Coins.
What actually happened, according to Longfin’s SEC filing: Longfin bought an asset called “Ziddu.com” from Meridian Enterprises, a Singapore corporation, 95% of which is owned by Longfin’s CEO and chairman.
On Wednesday, Longfin shares closed at $59.95, down 58% from its peak a few days ago.
This total insanity over outfits claiming to have a blockchain-related activity has been an ongoing movement over the past few weeks and months.
Shares of Digital Power Corp. [DPW], a dotcom-bust survivor, if barely, soared 880% from $0.56 on November 21 to $5.50 on December 18, though it shares have since plunged to $4.05. The company makes lowly power supplies for computers, but after it announced that it would aim its power supplies at cryptocurrency miners, its shares took off.
There is a gaggle of others with similar trajectories: Beverage-maker Long Island Iced Tea [LTEA] soared 280% within seconds after it announced that it would change its name to Long Blockchain; also Riot Blockchain, Seven Stars Cloud Group, Siebert Financial Corp, among others. They all have minuscule or no revenues, though their combined market capitalization is many billions.
That these companies get away with this, that in fact speculators fall for this crap, that they’re stupid enough to bet what are in aggregate many billions of dollars in a matter of seconds after “blockchain” flashes across their screens, is a sign of just how far the global flood of liquidity has befuddled the minds of these speculators and turned them into knee-jerk betting automatons. This phenomenon happens only during the very late stages of a bubble. But going back over the last three bubbles and crashes, to 1987, I have never seen anything this crazy. This is truly awe-inspiring.
My View: Pure speculators in Bitcoin stocks do have a highly profitable opportunity. Pure insanity has taken over and these stocks are poised to move in ways (to the up or downside) in ways most stocks never do. There is a flood of liquidity yet a dearth of prudent investments. Investors don’t know where to put their money so they are almost forced to become speculators. Some speculators may do extremely well. Of course, where one speculator gains, another speculator loses.
You can read more of our current analysis and forecasts on the global stock markets, bond markets, and global economies in our award-winning WELLINGTON LETTER, now in its 41st year.