Let’s examine investing in blockchain tech, which was developing ahead of steam and with much excitement from investors prior to November 2021.
However, the sector has seen a severe downturn in fortunes over the past year. The 70.1% decline in the Global X Blockchain ETF and the 51.3% drop in the Amplify Transformational Data Sharing ETF are indicative of these difficulties.
But what are blockchain technology stocks, and are they worth backing?
What are Blockchain Technology Stocks?
As the name suggests, blockchain technology stocks are stocks that design, operate or sell blockchain technology or else profit from it in some other way. Blockchains are essentially databases that store data in blocks that are then chained together, with this sequence creating a timeline that allows for comprehensive tracking of data.
The businesses might be cryptocurrency exchanges, crypto miners, payment processors or software developers.
Some examples include:
Paypal (NASDAQ: PYPL)
IBM (NYSE: IBM)
Riot Blockchain (NASDAQ: RIOT)
Coinbase (NASDAQ: COIN)
Block (NYSE: SQ)
Argo Blockchain (NASDAQ: ARBK)
Due to the nature of their work, these companies are often heavily reliant on the growth or stability in the value of cryptocurrency. For example, bitcoin miner Argo Blockchain said in its most recent operational update that it held 512 Bitcoin on 30 September 2022.
However, the more diversified companies among the group, such as Paypal and IBM, are much less exposed to the volatility of crypto prices.
What is the Bear Case for Blockchain Technology Stocks?
The first thing to be aware of is that we are currently in a broader bear market, with pessimism and low confidence pervasive across the investment landscape. During such times, investors tend to seek investments that are seen as safer bets, such as bonds, consumer staples or utility equities.
Cryptocurrency doesn’t really fit this profile, with digital currencies having gained a reputation for volatility. A lack of crypto investment is bad news for a lot of blockchain tech stocks.
For example, Coinbase’s most recent earnings update saw the business report net revenue of $803m, compared with $2.03bn in the same period last year. The decline came as trading volume and transaction revenue declined by 30% and 35% sequentially as Coinbase acknowledged it had been a “tough” period.
It could get tougher too.
As time goes by, there is an increasing risk that crypto miners who are holding on to large quantities of cryptocurrency in the hopes that prices will increase will be forced to offload significant amounts of the currency in order to cover operational costs.
Though it might sometimes serve to protect investors from fraud, tax issues and other risks, regulation can also be a significant hurdle for blockchain technology stocks. That’s because there is a concern that regulation could turn some crypto fans away from the asset, with distrust of governments and major financial institutions having been a major incentive for some adopters.
With the SEC and other regulatory agencies around the world increasingly wading into the crypto space, it could lose its lustre for some more libertarian or anarchist-minded backers.
What is the Bull Case for Blockchain Technology Stocks?
To examine the bull case, let’s first examine what factors could positively impact the price of cryptocurrencies moving forwards.
Blockchain data specialists Glassnode pointed out earlier this week that steadfast backers of Bitcoin, known as HODLers, have reached an all-time-high level of coin ownership. As such, it appears that long-term investors have set themselves to accumulation and remain convinced that Bitcoin will bounce back.
It’s also worth noting that the same Coinbase earnings update referenced earlier in this article stressed that crypto was “cyclical.” The shareholder letter explained:
“The current downturn came fast and furious, and we are seeing customer behavior mirror that of past down markets. During these down markets, we remain focused on building great products, while we typically see more casual competitors step back.
“Each crypto cycle has landed higher than the previous one, due to innovations built during the down turns.”
By this logic, the company expects that businesses that make it through the current difficult period without offloading their crypto wealth could stand to make significant profits when we come out the other side.
Are Blockchain Technology Stocks a Good Investment?
At the moment, blockchain technology stocks look like a risky investment. Cryptocurrency has been decimated over the last year, and, despite assurances from advocates, people seem far from convinced that crypto is the future of currency.
Many blockchain tech stocks have their fates inexorably tied to the fortunes of cryptocurrency, particularly crypto exchanges and miners.
Even so, blockchain is not limited to cryptocurrency.
For example, IBM utilizes blockchain technology for a number of diverse applications. The computer giant lists use cases that extend to tracking the freshness of seafood from supermarkets to restaurants. The business says its offering serves customers from the retail, manufacturing, oil and gas, healthcare and financial services segments, as well as more besides.
Investors looking to capitalize on the possibilities of blockchain technology without the exposure to cryptocurrency-related risks might be more inclined to invest in businesses like IBM, which uses the technology to enhance an already established and diverse offering.