With just over a week left before 2017 comes to a close, we can safely say that this has truly been the year of the cryptocurrency.
Just how good have virtual currencies been this year? Well, the stock market is the long-term greatest creator of wealth, with average annual gains of 7%, inclusive of dividend reinvestment and adjusted for inflation. In comparison, the aggregate market cap of every digital currency combined has jumped by more than 3,500% since Dec. 31, 2016, through Dec. 19, 2017. In less than a year, we've witnessed a number of digital currencies deliver a lifetime's worth of gains.
This surge is all about the emergence of blockchain
There has been no shortage of catalysts for the astronomical run in digital currencies this year. But topping that list is the emergence of blockchain technology, which was made famous by the world's most popular cryptocurrency, bitcoin. Blockchain is the digital, distributed, and decentralized ledger that underlies most cryptocurrencies and is responsible for logging all transactions without the need for a financial intermediary like a bank.
There are a number of critical advantages to blockchain that have many pundits believing this could become an extremely valuable technological advancement for the financial services industry and other tech-centric industries. To begin with, blockchain is expected to be considerably safer than standard databases. The reason is that there's no central data center where cybercriminals could attack. Instead, information is spread on servers and hard drives across the globe, all but ensuring that a cyberattack can't cripple a digital currency.
Second, blockchain could result in considerably lower transaction fees because there's no third-party involvement. Without having to line the pockets of banks that act as financial intermediaries, blockchain can boost margins for businesses, or perhaps save consumers money.
But the most exciting aspect of blockchain might be the potential to expedite transaction settlement times, especially concerning cross-border transactions. The current system involves banks that often hold transactions for days. With blockchain technology, this proofing might be done instantaneously.
This 2,500% move higher is mighty suspect
The euphoria surrounding blockchain development isn't limited to just the crypto space, either. Publicly traded companies that have announced their entrance into blockchain development have been handsomely rewarded by investors. One such example is The Crypto Company (OTC:CRCW). The company's over-the-counter shares jumped just over 2,500% between Dec. 4 and Dec. 18. In the process, its valuation ballooned to nearly $12 billion.
To put this gigantic move higher into some context, Crypto Company is now larger than the likes of Whirlpool, the largest appliance maker in the world, Kansas City Southern, one of the nation's biggest railroad companies, and Hasbro, a toy-making giant. Yet, despite Crypto Company's size, it has just two full-time employees (according to Yahoo! Finance), only $2.6 million in cash on hand, and generated only $487,692 in revenue during the third quarter, primarily as a result of cryptocurrency gains. Most notably, operating expenses and stock-based compensation pushed the company to a $1.51 million quarterly loss ($0.08 per share).
Dig a bit deeper and you'll discover that Crypto Company has only been a publicly traded company for a couple of months, and it actually went public by acquiring Croe, which is a fitness and apparel company that's primarily in the sports bra business. Only within the past three weeks has Crypto Company launched the first phase of its trading operations and platforms for digital currencies.
In other words, this is really nothing more than a developmental-stage company with a nearly $12 billion market cap.
The SEC agrees, and has suspended trading for two weeks
Now, here's where things get really interesting. Despite having around 20 million shares outstanding, trading volume shows that it took fewer than 33,000 total shares traded over a five-day period to move the company's share price from $22 to as high as $642 (actually pumping its market cap above $13 billion). Basically, 0.0016% of outstanding shares traded moved this stock over 2,800% higher in five days' time. That's unreal, and the Securities and Exchange Commission (SEC) agrees.
On Dec. 19, the SEC issued a temporary suspension of The Crypto Company's shares that'll last until midnight on Jan. 3. According to the press release:
The Commission temporarily suspended trading in the securities of The Crypto Company because of concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the compensation paid for promotion of the company, and statements in Commission filings about the plans of the company to sell their shares of The Crypto Company's common stock. Questions have also arisen concerning potentially manipulative transactions in the company's stock in November 2017.
The last time the SEC issued a two-week suspension to a blazing-hot cryptocurrency stock, it absolutely imploded once trading began. First Bitcoin Capital Corp. (OTC:BITCF) had its shares suspended in August for two weeks after rampant speculation sent its shares higher by nearly 10,000% from where it began the year. Upon the commencement of trading, shares of First Bitcoin Capital lost about 70% of their value.
While the SEC might just be extra cautious, these trading halts amid suspicious trading activity often serve as a warning to investors. The lesson to be learned here is that adding the words "bitcoin," "blockchain," or "crypto" to a company's name doesn't in any way justify a massive appreciation in value for a developmental-stage company. My suggestion remains the same as it's been for months: Avoid the bitcoin and blockchain euphoria for the time being.