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It’s History All Over Again for Cryptocurrencies, Fintech Companies and ICOs

We are seeing similar analyst trends with regard to investments in cryptocurrencies, fintech companies and Initial Coin Offerings (ICOs), as we did for the Internet Bubble of the 1990s to 2000.

Referencing to Penman’s book on Financial Statement Analysis and Valuation, here are the some of the analyses that were presented leading up to the crash.

  • Profits were not very important, even though many dot.com companies were suffering losses. This is because analysts solely emphasized the “new business model” era that Internet businesses were going into.
  • Analysts commented that traditional financial analysis was no longer relevant. Referencing to point #1, old ways of thinking were deemed to be obsolete.
  • The wave of Internet lingo such as “web tech”, “network effects” and “new economy” caused hype amongst investors
  • Value was being attributed to “intangible assets”, but did not indicate a logical test for affixing numbers to those “assets”.
  • Non-financial metrics or non-cash flow financial metrics were used – Price-to-Sales (P/S), Sales growth, usage rates, customer reach… The reason why revenue growth doesn’t translate to actual profits or cashflow is explained in my other article HERE.
  • Extremely optimistic forecasts. Many analysts assumed overtly high growth rates.
  • Historical perspective was ignored. Cisco traded at P/E of 135, an unprecedented figure for a large-cap. There was no reasonable justification to why an investor would pay 135 times earnings for the company.
  • Markets gave such companies huge valuations of over $1 trillion, when their aggregate revenues were only at $30 billion.
  • Quality of earnings was not audited.
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To compare, we will look at some of the characteristics of market outlook for “cryptocurrencies, fintech companies and ICOs”.

  • Traditional financial analysis ignored. Bitcoin has been described as a new asset class. I quote from FXStreet, “the crypto community seems to have hardened towards (negative) comments from people who are involved in the traditional financial markets.”
  • Signals to buy or sell dependent on arbitrary technical indicators such as the “misery” index. According to CNBC, “The index takes into account factors such as the number of winning trades out of the total and volatility”
  • New financial ratios created to value cryptoasset price movements. These include the┬áNetwork Value to Transaction Volume (NVT) and Network Value to Metcalfe (NVM) ratio.
  • Value attributed to “(it being) a store of value… a medium of exchange” or “potential applications in disrupting and optimizing XXX industries”
  • Extremely optimistic forecasts. Many analysts assumed overtly high growth rates.
  • Huge valuations given, in part due to public ICO funding.

The rise of cryptoassets, Blockchain-backed technology companies and ICOs seem to mirror the Internet craze of the 1990s a lot, and this is something to be cautious about.

However, I am not saying that you should not invest in cryptoassets or Blockchain businesses. I believe that Blockchain and cryptocurrencies will provide society and industries with new ways of doing business and “disrupt the industry” as they say.

However, a smart investor has to understand the risks of buying at a phase where the value of the “asset” is still not yet intrinsically or socially determined.

One does not want to suffer the losses from investing in a Pets.com-like altcoin or ICO, only to regret it years later.

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