Bitcoin stocks had a good run in 2017, cashing in on the euphoria surrounding the cryptocurrency's 1,400% surge. In 2018, gains may be harder to come by for these three bitcoin-related stocks, all of which I believe will be likely losers in the new year.

Bitcoin Stock

2017 Return

First Bitcoin Capital Corp. (BITCF)

3,589.7%

Bitcoin Investment Trust (GBTC 3.32%)

1,557.2%

Riot Blockchain (RIOT 5.16%)

665.6%

Data source: Morningstar.

First isn't always best

First Bitcoin Capital Corp. currently operates a number of businesses with tangential relationships to cryptocurrencies, including the website AltCoinMarketCap.com, which it says puts it in direct competition with CoinMarketCap.com, one of the busiest bitcoin sites.

Most businesses in the holding company's portfolio have more "coming soon" text than real operations. It also has the dubious honor of being one of the first bitcoin stocks the Securities and Exchange Commission halted, over problems with the "accuracy and adequacy" of available information about the stock's assets and capital structure. Alas, First Bitcoin Capital Corp. trades at a price that imputes a total market value of roughly $275 million.

That's a high valuation to place on a money-losing gold miner whose principal businesses now include a few start-up content websites, an investment in three check-cashing kiosks worth $86,000, and holdings of various thinly traded cryptocurrencies with names like WEED coin, which were issued in exchange for President (GARY) Johnson coins. (I'm not making this up.)

Artist's rendering of what a physical bitcoin might look like.

Image source: Getty Images.

A pricy, sort-of bitcoin ETF

I consider Bitcoin Investment Trust the only "legitimate" bitcoin stock on this list. Sponsored by Grayscale Investments, Bitcoin Investment Trust is a sort-of bitcoin ETF that currently holds approximately 0.092 bitcoins for each share outstanding. But even legitimate bitcoin-related stocks can have their issues.

The problems with Bitcoin Investment Trust are twofold:

  1. It carries a high management fee. Bitcoin Investment Trust pays 2% of its assets each year to its sponsor as a management fee. That's high, even in the world of closed-end funds, which typically carry higher management fees than other funds.
  2. It often trades at a sky-high premium to net asset value. Historical data shows that on the median day, Bitcoin Investment Trust closed at a price approximately 42% higher than what its bitcoins were worth at the time.

Whatever you may think about the investment merits of bitcoin, it's hard to rationalize buying the digital currency through a vehicle that frequently trades at prices far higher than its underlying bitcoins are worth. 

Bitcoin Investment Trust trades at a ludicrous premium because of a supply-and-demand imbalance that will prove to be temporary, in my view. As it stands, investors have few ways to speculate on the price of bitcoin, making Bitcoin Investment Trust a popular stock for speculators to trade. That could soon change.

Alternatives such as bitcoin futures, and futures-based bitcoin ETFs, could steal some of Bitcoin Investment Trust's thunder. When that happens, I expect Bitcoin Investment Trust's premium to the value of the bitcoin it owns to shrink, potentially leaving investors holding a loss even if the price of bitcoin rises in 2018. 

Failed biotech turned bitcoin investor

Though it was been one of the most successful bitcoin stocks of 2017, irrational exuberance is only temporarily papering over Riot Blockchain's red flags.

The biotech company-turned-cryptocurrency investor owns stakes in several small companies that make money by providing the picks and shovels to the bitcoin boom. But as time goes on, Riot Blockchain will have to start producing profits, not just press releases, to keep its share price moving in the right direction.

Riot's short timeline is full of questionable events. Since changing its name to reflect its new focus on the blockchain in October 2017, Riot Blockchain has:

  1. Issued preferred stock to overpay for a two-week-old cryptocurrency mining company.
  2. Planned to merge one of its portfolio companies with a suspect Canadian penny stock.
  3. Adjourned an annual meeting at which it was asking shareholders to approve an increase in the number of shares it can issue to insiders.
  4. Issued stock at a deep discount to its then-current market price in a negotiated transaction.

But really, that's just the start. At the end of 2017, right before a major holiday weekend, the company disclosed that its CEO cashed out by selling stock worth approximately $879,000. That tells me a lot about what its most important insider thinks of its surging stock price.

Riot Blockchain's investment merits are dubious, its capital structure is convoluted (good luck keeping up on all the preferred shares, warrants, and options it issues), and its portfolio companies have unknown value that can only be loosely triangulated from promotional press releases. These three factors set the stage for a disastrous 2018, in my view.

Bitcoin in name only

During the dot-com boom in 1999, companies changed their name to include the terms "internet" or ".com" to send their share prices surging. On average, companies that employed the trick generated excess returns of 74% in the 10 days surrounding the name change, according to one study.

A similar thing is going on in bitcoin stocks today, as companies that change their name to include anything related to "bitcoin" or "blockchain" are met with a nearly instantaneous increase in the price of their shares.

The novelty of investing in bitcoin-related stocks may have fueled gains in 2017, but I think the boom will turn to bust in 2018 as investors realize that corporate profits, not promotional name changes, ultimately drive stock prices in the long run.