Whether you feel cryptocurrencies are the next big thing or share Warren Buffett's opinion that the current craze "will come to a bad ending," you can't deny cryptocurrencies are the topic du jour in the financial markets. And understandably so: The cryptocurrency market has exploded 3,860% from the $18.3 billion market cap at the beginning of 2017 and is now worth a collective $725 billion.
As with any hot technology, there are companies and individuals that will seek to ride coattails for their own gain. A classic example of the dot-com bubble of the mid/late 1990s, when companies would explode simply by putting the words "dot-com" in their names. It appears this trend is reoccurring with cryptocurrencies, as there's a nascent trend of companies seeking to rename their companies by integrating crypto-friendly buzzwords or by announcing they're creating a coin. Investors should be skeptical of these "cryptocompanies." Two recent examples -- Eastman Kodak (NYSE:KODK) and Long Blockchain (NASDAQ:LBCC) -- warrant further introspection.
Kodak's now a cryptocompany?
Kodak uniquely understands what it's like when a company misses out on new technology. For years the company was so synonymous with photography that the phrase a "Kodak Moment" was used to denote a photo-friendly event. Years of underestimating the threat of digital photography took their toll and the company filed for digital protection in 2012. It's likely the threat of disruption is salient with Kodak management, but it appears the company is overcorrecting with its foray into cybercurrencies.
The company announced it would create a new photo-centric cryptocurrency, KODAKCoin with a partnership with WENN Digital in addition to creating a blockchain network for amateur photographers to receive payments and prevent the unlicensed use of images. In response, investors have bid up shares of the company approximately 225% as of this writing.
To Kodak's credit, the underlying blockchain technology appears to solve a problem that plagues the industry, image rights management, but other companies already have solutions, most notably Shutterstock. Investors appear to be buying shares without information about the business environment or Kodak's chance of success in this business.
Most likely, investors are excited for Kodak's new cryptocurrency. However, it would seem the most-direct way would be to buy the coin itself, whether it be the KODAKCoin or another cybercoin.
Long Blockchain's story is more bizarre
Last month, shares of Long Island Iced Tea Corporation changed its name to Long Blockchain Corporation and announced it was changing its business focus away from non-alcoholic beverages to mining cryptocurrencies. Again, shares rallied on the announcement, rising nearly 300% at day highs before finally settling with a daily gain of approximately 200%.
Later, the company noted it would issue approximately 1.6 million shares at $5.25 per share to buy 1,000 mining rigs to start its digital mining business. This month the company backed away from the public offering while still committing to the plans to buy the mining equipment. It's unclear where the company will find the cash to purchase the equipment as Long Blockchain has less than $500,000 of cash on hand and generated negative cash flow from operations.
In the intermediate timefime, however, the company is making beverages... the same business it has been running since its founding. And that hasn't been lucrative: through Sept. 30, this business has lost $11.6 million on total revenue of $3.9 million this fiscal year.
Look for this to continue
Unfortunately, look for more companies to opportunistically cash in on cryptocurrency mania with splashy announcements and cryptocurrency-friendly name changes. When it comes to this new technology, investors should disregard these businesses until proof of concept is established and the company is reporting revenue from the venture.
In the end, investors of Kodak and Long Blockchain are buying companies based on unproven blockchain technology with the overlay of execution risk from two companies that have displayed a history of poor execution in their core businesses. Buy Eastman Kodak and Long Blockchain's equity based on their core businesses. If you have carefully weighed the risks of cybercurrencies and still want exposure to this asset class, buying direct appears to be a wiser approach.