The New Criterion: from bitcoin to blockchain

Just as the bitcoin emerged from the cyber haze in 2017, 2018 is emerging as the year of blockchain, the underlying technology supporting cryptocurrencies. Is blockchain another form of crypto craziness, or a more respectable iteration of bitcoin and its many cousins?

As with bitcoins et al, few investors outside of the rarefied tech head world really understand how blockchain – a.k.a distributed ledger technology – works. Not that that will deter them.

Suffice to say, blockchain a method of recording transactions securely not just in the one repository, but across the whole transaction chain. As such, it has myriad uses unrelated to crypto currencies which currently have little utility other than supporting criminal money movements. Either that, or we’re all being subject to the same sort of con job the IT brigade inflicted on the world with the Y2K virus.

While down-and-out minnows continue to discover a sudden interest in bitcoins, blockchain fever is starting to engulf bourses here and elsewhere. In the US, shares in unprofitable soft drink maker Long Island Iced Tea almost tripled after the company re-named itself Long Blockchain. In its new guise the company said it would seek to partner with companies developing blockchain ledgers. If that’s not enough Croe Inc was developing innovative sports bras, before acquiring a blockchain company for extra share price ‘support’.

ASX stocks in need of an extra bounce have also been quick to sniff the breeze. Last December, the HR play Reffind (RFN, 3.8c) bought a stake in loyalty scheme manager Loyyal.com, which seeks to use blockchain for business process improvement. Reffind’s change of tack is supported by the listed investment company Chapmans (CHP, 1.6c), which invested $1m in Reffind’s recent placement (thus making Chapmans Reffind’s biggest holder with a 9% stake).

Insofar as it serves a use rather than being a speculative vehicle, investing in blockchain looks to be a more sustainable strategy than the go-for-broke punt on bitcoin. Plenty of fortunes have been made on bitcoin’s spectacular appreciation, but the currency (or it commodity) looks to have peaked. Also bear in mind that there are hundreds of other crypto currencies, so the supposed rarity of bitcoin can’t be equated with the rarity of gold.

In your columnist’s view, the more sensible plays are those that are adopting blockchain as an adjunct to their existing activities rather than as an unrelated sideline.

Take the logistics group Yojee (YOJ, 29c), which has developed cloud software to automate and streamline the movement of goods. For Yojee, the appeal of blockchain is that it creates an indisputable record of existence of a transaction and where the goods are in transit. This means payments can be made more quickly. To date’s Yojee’s revenues ($62,000 in the September quarter) aren’t exactly commensurate with the company’s $180m market valuation.

But blockchain or not, Yojee is gained momentum with a number of recent overseas contracts. These include deliveries for Scharff (which services Peru and Bolivia for FedEx) and a preferred software status for the Indonesian Logistics and Freight Forwarders Association.

Elsewhere, the US centric payments house Change Financial (CCA, $1.05, formerly known as ChimpChange) already uses a blockchain ledger for its core consumer banking business. (As we’ve covered previously, Change provides a mobile-phone based transaction service for under banked millennials). Now, Change is investing $US100,000 as seed capital in a venture called the Ivy Project, which seeks to develop a blockchain based cryptocurrency for transactions worth more than $US10,000. CEO, Ash Shilkin says

“Involvement in the Ivy Project is a natural investment for our company as blockchain and cryptocurrencies are rapidly evolving as an innovative solution in storing data, moving money and conducting transactions. We have grown to service 130,000 banking customers in the US and this investment will extend our reach to business to consumer and business to business banking.”

Meanwhile, the obscure Ookami (OOK, 7.1c) is investing a tad under $1m for an 18 per cent stake in the private blockchain company Brontech, founded by blockchain guru Emma Poposka. Described as a data marketplace and digital identification platform, Brontech is all about capturing financial data directly from users, thus allowing customers to capture the monetary value of their personal information.

Such data is the core of Experian’s business model, Brontech can be genuinely described as a disruptor. Ookami’s investment also comes ahead of the introduction of open banking, which will force banks to share customer data with third-party providers potentially offering a better deal to these clients.

Once again, the technical aspects of blockchain’s role are hard to master, especially for investors shaking off holiday cobwebs. But the Brontech deal, unveiled on December 11, was enough to send Ookami’s shares from 3.6c to a peak of 14c.

A comforting aspect of blockchain is that the $10.6bn market cap ASX Ltd (ASX, $54.60) is adopting the technology to replace the ageing Chess settlement system. The decision came after two and a half years of testing and deliberation and we’ll presume the bourse’s blue chip-board hasn’t been hijacked by the technology boffins. Even The Perth Mint – which is no friend of cryptocurrencies – is mulling blockchain technology to improve the security and traceability of that traditional speculative commodity, gold.

As for the minnows, it will be months (or years) before it becomes clear who the blockchain winners are – and which ones are simply pulling the chain with investors. It’s also possible that bitcoin and blockchain investors alike are ignoring the safest ‘crypto’ exposure. A recent global report from Morgan Stanley claims that bitcoin mining – the process of creating the ‘coins’ – is likely to guzzle 125 terawatts of electricity this year. Put in context, this enigmatic activity will use more power than the predicted demand for electricity vehicles in 2025.

Given that, energy utilities such as Origin Energy (ORG, $9.29) and AGL (AGL, $23.74) are shaping up as the real ‘crypto’ winners.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.