Carlos Velásquez · Medium · 10 min read · Photo by Anna Nekrashevich from Pexels

Which publicly traded companies offer investors the best chances of benefiting from the continued adoption of blockchain technology?

Answer using 1st-Level Thinking: “Continued blockchain adoption should positively impact the value of Bitcoin; purchasing shares of companies that have accumulated bitcoins on their balance sheets can therefore be profitable.”

Answer using 2nd-Level Thinking: “MicroStrategy has the largest bitcoin holdings, yet its stock price has underperformed relative to the stock price of companies with fewer bitcoins on their balance sheet. The value add-on provided by these other companies must be driving their market value. I will research similarly situated companies and invest in those that are earlier in their respective growth curve.”

Disproving 1st-Level Thinking: BTC On Balance Sheet

“When everyone is looking for gold, it’s a good time to be in the pick and shovel business.” ~ Mark Twain

Table 2, below, includes price comparisons of Bitcoin (BTC) and eight stocks with BTC on their balance sheets. Except for MicroStrategy (NASDAQ: MSTR)— a data analytics company whose bitcoin holdings account for 72.03% of its market cap — these companies’ respective bitcoin holdings have not been the primary catalyst for their stock price appreciation (see Table 1). Table 2 illustrates that before MicroStrategy accumulated BTC on its balance sheet (its first two purchases occurred in August and September 2020), MSTR’s price action was relatively flat. Post 12/16/20, MicroStrategy’s additional BTC purchases caused its stock price to appreciate further.

Square v. MicroStrategy/Bitcoin

Square (NYSE: SQ), a payment services company, initiated its BTC position on 10/8/20 (when SQ was worth $183.50/share). While Square has the second-largest bitcoin holdings (see Table 1), it accounts for just 0.37% of its market cap. However, on a percentage basis SQ appreciated by more than MSTR and BTC from 3/12/20 to 12/16/20 — a period in which BTC 4x-ed. (MSTR outperformed SQ post 12/16/20 primarily due to MicroStrategy’s additional purchases of BTC in December, February, and March totaling $1.66 billion; Square added just $170 million of BTC to its balance sheet in February.)

20/20 hindsight: SQ’s price benefited more from the value add-on provided by the Square Cash App than Square’s acquisition of bitcoins. The Cash App enables users to store money, make payments, manage credit cards, invest in stocks — and buy bitcoins. The Cash App is expected to remain profitable as Bitcoin’s adoption increases.

4 Mining Companies v. MicroStrategy/Bitcoin

Marathon (NASDAQ: MARA), Riot Blockchain (NASDAQ: RIOT), Bit Digital (NASDAQ: BTBT), and HIVE Blockchain (OTC: HVBTF) are cryptocurrency mining companies. Their bitcoin holdings account for no more than 1%-8% of their respective market caps (see Table 1). Their stock price appreciation has been 2x-6x greater than BTC’s and 4x-12x greater than MSTR’S from 3/12/20 to 4/23/21.

20/20 hindsight: the increased profitability resulting from mining bitcoins and verifying transactions on the Bitcoin network has been the catalyst of these companies’ stock price appreciation (RIOT Blockchain and HIVE Blockchain also mine other cryptocurrencies). These four companies are covered further in this article: “4 Crypto Mining Stocks Positioned To Outperform Bitcoin in 2021”.

Mogo Inc v. MicroStrategy/Bitcoin

Mogo Inc. (NASDAQ: MOGO)is a Canadian fintech company that provides a low-cost method of buying and selling bitcoins. Since 3/12/20, Mogo Inc.’s stock value has appreciated at a similar rate as MSTR, and at about half the rate of BTC, despite the value of its 50 bitcoins making up just 0.56% of its market cap (see Table 1).

20/20 hindsight: likethe Square Cash App, Mogo Inc.’s finance App has driven its stock price appreciation. Mogo Inc. also offers Bitcoin rewards cards and traditional loan services. Its subsidiary, Carta Worldwide, offers a digital payments platform to fintech companies in Europe, North America, and the Asia Pacific.

FRMO Corp. V. MicroStrategy/Bitcoin

FRMO Corp. (OTC: FRMO) is a holding company of intellectual capital and a cryptocurrency mining play through its subsidiaries and limited partnerships.FRMO Corp.’s direct bitcoin holdings account for 1.49% of its market cap (See Table 1). As of 4/23/21, FRMO’s price performance lagged that of MSTR’s, BTC’s, and of the other stocks’ analyzed herein, yet has 3x-ed since 7/26/20 (its 52-week high is $15.50 per share).

20/20 hindsight: FRMO Corp.’s 63 bitcoins amount to $3.2 million. The company also directly/indirectly owns 558,155 shares of Grayscale Bitcoin Trust (OTC: GBTC). Per its 2020 Annual Report, the block rewards of its subsidiaries’ and limited partnerships’ mining activities enabled FRMO Corp. to accrue various crypto assets. Based on 4/23/21 asset prices, the company’s balance sheet contains $27 million worth of crypto assets. See Table 7.

FRMO Corp.’s total crypto assets account for 12.5% of its market cap. The price volatility of these assets may make FRMO’s shares inefficiently priced at times, which investors could exploit by placing resting limit orders that are set to buy an increasingly larger number of shares at lower price points.

Using 2nd-Level Thinking: In Search Of Value-Add

The eight companies analyzed above fall into three categories, with FRMO straddling two (albeit its indirect ownership of mining operations appear to be minor):

• Financial Technology: (SQ, MOGO)
• Mining Companies: (MARA, BTBT, RIOT, HVBTF, FRMO)
• Cryptocurrency Holding Companies: (MSTR, FRMO)

The value-add provided by the companies in the first two categories appears to be driving their respective stocks’ price appreciation, which in some cases has been superior to BTC’s during the period analyzed. The stock price appreciation of MSTR and FRMO (the third category) has been proportional to the value of the cryptocurrencies on their respective balance sheets — i.e., it was less than BTC’s price appreciation — meaning that buying and holding BTC would have been a better investment than holding MSTR or FRMO stock in one’s portfolio.

Below are several more publicly traded companies in the blockchain ecosystem. They can be grouped into two categories, with DMGGF and TAALF included in both:

• Mining Companies (ARBKF, DMGGF, TAALF, BFARF, HSSHF, HUTMF)
• Software/Hardware Companies (DMGGF, TAALF, CAN)

These stocks could be of further research interest for folks seeking to utilize 2nd-Level Thinking when investing in blockchain technology and its overall ecosystem.

Argo Blockchain plc

Argo Blockchain plc (OTC: ARBKF) owns one of the largest cryptocurrency mining operations that is powered by clean energy.  It is headquartered in London, UK, but can be purchased in the U.S. under the ticker ARBKF. (*The price of ARBKF on 3/12/20 and 7/26/20 was prorated based on its listed price in the London Stock Exchange (ARB.L). ARBKF’s 12/16/20 price is from 12/17/20, the first day Google Finance lists its price.)

• Partnered with DMG Blockchain to create a hydroelectric powered Bitcoin mining pool
• Has three operational facilities in Canada that mine Bitcoin and Zcash
• Acquired 320-acres in Texas to expand its mining operations that will be powered with 200 MWs of renewable energy
• As of 4/23/21, it has 764 bitcoins on its balance sheet

DMG Blockchain Solutions Inc.

DMG Blockchain Solutions Inc. (OTC: DMGGF) is a Canadian mining company transitioning to providing specialized supply chain and forensics services to diversify its earnings base.

• Hosts equipment and distributes mining rewards
• Is developing a blockchain software platform suited for supply chain management and other IoT applications
• Acquired an AI company (Blockseer) to enhance its forensic capabilities and provide forensic services for blockchain networks to law enforcement
• As of 4/23/21, it has 220 bitcoins on its balance sheet

Bitfarms Ltd.

Bitfarms Ltd. (OTC: BFARF) runs vertically integrated mining operations and has a diversified production platform with five industrial-scale facilities located in Quebec, Canada. Each facility is 100% powered by hydropower secured via long-term power contracts.

• Seeks to expand into North America and elsewhere
• Has a non-binding MOU with a private energy producer to secure exclusive use of up to 200 MW of electricity in South America
• Is the only publicly traded pure-play mining company audited by a Big Four audit firm
• As of 4/23/21, it has 1,139 bitcoins on its balance sheet

Digihost Technology Inc.

Digihost Technology Inc. (OTC: HSSHF) is a Canadian blockchain technology company that mines cryptocurrency and provides hosting services to miners. It was formerly known as HashChain Technology Inc. Its website is under development but includes the following general statements of Digihost’s strategic initiatives.

• Is increasing its mining capacity and acquiring additional rigs
• Plans to begin mining alternatives cryptocurrencies
• Is expanding its proprietary software to optimize its mining activities
• Is forming strategic alliances that will further improve its efficiency and profitability
• As of 4/23/21, it has 184 bitcoins on its balance sheet

Hut 8 Mining Corp.

Hut 8 Mining Corp. (OTC: HUTMF) has one of the highest installed capacity rates in the cryptocurrency mining industry and is ranked #1 globally in held, self-mined, bitcoins among crypto miners (Marathon Digital Holdings Inc. has more bitcoins but purchased most of them).

• On 3/26/21, Hut 8 purchased $30 million of NVIDIA CMPs; their full deployment is expected to be completed during the summer of 2021
• Is seeking to convert waste (flare) gas into energy for Bitcoin mining
• Established a yield account with Genesis capital where it is earning 4% in interest on 1,000 bitcoin
• As of 4/23/21, it has 3,233 bitcoins on its balance sheet

Canaan Inc.

Canaan Inc. (NASDAQ: CAN) designs and sells, as well as assembles and distributes, integrated circuits for bitcoin mining. Canaan Inc. collaborates with Northern Data AG in artificial intelligence development, blockchain technology, and data center operations.

• Experienced a surge of demand for its mining machines in and outside of China in late 2020
• Began large scale delivery of its next-generation A12 series of bitcoin mining machines in the first quarter of 2021
• Designed two new series of AI chips that will be in production in the second half of 2021
• Has secured a large number of pre-orders from clients in domestic and international markets

Taal Distributed Information Technologies Inc.

Taal Distributed Information Technologies Inc. (OTC: TAALF) is a vertically integrated Canadian blockchain company. TAAL seeks to become the leading BitcoinSV enterprise blockchain transaction processor. Taal provides blockchain infrastructure and transactional platforms to support business applications in Canada, Kazakhstan, and Cayman Island through its subsidiaries.

• Investing in TAALF is a bet on the BitcoinSV (“Satoshi Vision”) blockchain network
• Has three revenue drivers: mining, transaction processing, and value-added services/software fees
• Has strong financial supporters, including Billionaire Calvin Ayre
• Owns intellectual property, TAAL Orchestrator, WhatsOnChain, and the TAAL Console

Use 2nd-Level Thinking, Or Just HODL

Omitted from this analysis were a few well-known and several less well-known companies traded in U.S. exchanges: Tesla (NASDAQ: TSLA), Paypal (NASDAQ: PYPL), Coinbase Global, Inc. (NASDAQ: COIN), Banxa Holdings (OTC: BNXAF), Future FinTech Group Inc. (NASDAQ: FTFT), SOS Limited (NYSE: SOS), Coin Citadel (OTC: CCTL), BTCS Inc. (OTC: BTCS) and Ebang International Holdings Inc. (NASDAQ: EBON).

Tesla was omitted because its recent BTC acquisition is not a primary driver of its stock price. PayPal, unlike Square, does not have bitcoins on its corporate balance sheet. Coinbase’s recent IPO makes it too early to analyze in the manner chosen here (i.e., drivers of price stock appreciation); ditto for Banxa Holdings, which was just listed in February 2021. Future FinTech Group and SOS Limited are Chinese “blockchain” e-commerce and AI companies whose relevance to the blockchain ecosystem is unclear. Coin Citadel and BTCS Inc. are *penny stocks— albeit interesting moonshot plays since penny stocks usually do not have bitcoins (513 and 79, respectively) on their balance sheets. (*The technical definition of a penny stock is: a stock that trades for less than $5; my working definition of a penny stock herein is: a stock that trades for less than $1. Both CCTL and BTCS traded below $1 on the day of this writing.)

Ebang International Holdings Inc., a hardware and cryptocurrency exchange company, was excluded due to recent accusations made by notable short-seller Hindenburg Research. It accuses Ebang of illicit use of capital raised from U.S. investors and posting fictitious trade volumes on Ebonex, its cryptocurrency exchange.

Does Ebang represent a cautionary tale for blockchain stocks? Or is it a buy-the-dip opportunity? As with all investment decisions, it is incumbent upon investors to do their own 2nd Level Thinking when answering such questions.

As for those investors stuck on 1st Level Thinking (“Continued blockchain adoption should positively impact the value of Bitcoin…”)?

They should simply buy and HODL bitcoins.

Author also wrote: Bitcoin’s Volatility | 50 Investment Lessons |Flywheel Effect | Bitcoin: Mental Framework | Crypto Moonshots | 4 Crypto Stocks | Bitcoin: Insurance | Brief History: Money | Spontaneous Order | Ackman’s $2.6B Moonshot | Fragility Inducing Events | Antifragile: Definition | 1% Bitcoin: 99% Cash | COVID-19: Market

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