Should you Invest in an ASX Bitcoin Company?

In the next few weeks a company is going to list on the Australian Stock Exchange. This company is hoping to raise $20 million. That’s fiat money, just so you’re aware.

I bring up the point that it’s fiat money because this company is all about Bitcoin. And Bitcoin is inherently anti-fiat money.

You see, the company that’s going to list on the ASX is the Bitcoin Group Limited. They are a Bitcoin Miner. What is a Bitcoin Miner you might ask? Good question, and I’ll get to that in a moment.

But what I want to do before is to let you in on a secret.

The very fact this company will list on the ASX completely contradicts the purpose of Bitcoin. Not only could this be the most controversial listing in the history of the ASX. But it could also be one of its most spectacular failures.

What is a Bitcoin Miner?

Let’s get one thing straight. Bitcoin exists solely in the digital world. It is, in its most basic description, a digital currency.

Although in the US they have decided Bitcoin is a commodity. Just like gold and oil. And in Russia they have decided to ban Bitcoin completely. Oh, and the Aussie banks have put a ban on supplying services to Bitcoin companies. And even in Australia the government, ATO and ASIC still really don’t know what Bitcoin is or isn’t.

To actually define Bitcoin isn’t that easy. And that alone sets off warning bells.

But let’s look at the very origin of Bitcoin. When it entered our digital world in 2008/9 it had a purpose. In the whitepaper ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, Satoshi Nakamoto explains, ‘We have proposed a system for electronic transactions without relying on trust.’

In other words a digital unit of exchange free from government intervention. Its decentralised nature makes it free from monetary control, and free from the meddling of central banks.

He might not have known what he was starting. But its essence is that Bitcoin is anti-fiat money. It’s the ultimate libertarian currency.

Its core technology is something we call the ‘blockchain’. Now this blockchain is a potentially world changing technology. It’s a giant online ledger that records all transactions but keep the parties anonymous. At the moment it’s only really used for Bitcoin. But over the coming years, blockchain could be used for much more.

The possibilities include an ‘Internet of Things’ blockchain. Or perhaps a stock market blockchain. The NASDAQ is currently trialling blockchain technology on its pre-IPO private market. My bet is one day they’ll use it for all NASDAQ trades.

The way I see it the real tech game-changer here is the blockchain. And when a legitimate blockchain company decides to list, then we’ll be having a different conversation.

Now that’s not to say Bitcoin isn’t a game changer. It is – unless capitalism tears it down.

Anyway, let’s get back to Bitcoin mining.

We need power. Lots of power.

To ‘mine’ Bitcoin you need a computer. A really powerful computer. Or in the case of a mining business, lots of powerful computers working together. Or even many users with powerful computers connected together to create a mining ‘pool’.

The reason you need powerful computers is that to ‘mine’ and receive a Bitcoin for your efforts, you need to solve a complex algorithm. The more powerful computers on the Bitcoin network, the harder it becomes to mine coins. Hence you need ever-more powerful computers. It’s a bit of a computer-power arms race between miners, really.

So to stay ahead of the game you need power. Lots of power.

Back when Bitcoin first came about you could mine with a normal computer. Then later you needed a pretty decent graphics card to keep up. Now there are dedicated ‘mining rigs’. These are borderline supercomputers. It’s expensive and capital intensive to stay competitive as a miner.

However if you do solve the algorithm your reward is a block of Bitcoin. Currently one block is 25 coins. In Aussie dollar terms that’s $8,447 (1BTC = $337.88). The more blocks you mine, the more money you make.

It’s also important to remember Bitcoin in dollar terms has been as low as 1 cent and as high as $1,250. The volatility in price is alone a risk no one should mess with.

But here’s the real problem for ‘miners’. Around June next year the reward will halve to 12.5 Bitcoin. A guaranteed 50% fall in revenue. Oh no!

That will halve again to 6.25 Bitcoin. But it’s estimated not to until around 2021.

So diminishing revenues are a guarantee if you’re a Bitcoin miner. That is unless you get more power. More power means a better chance of solving the algorithm. And more blocks.

But more power means more hardware, more electricity and more money.

And any sharp drop in the price of Bitcoin all of a sudden means costs outweigh reward.

However, all this pales into insignificance. The really big problem with a public traded Bitcoin mining company goes back to why Bitcoin even exists.

Why do companies go public?

When you’re a private company you go public to raise capital. You use this capital to expand and grow the business. And your responsibility is to maximise return for shareholders.

And if you’re an ASX listed company, that ‘return’ comes as an increase in the price of your stock. That way investors buy in, hopefully sell higher, and make a profit. But this is all in Aussie dollars. So to make returns on your income sheet you need to be making Aussie dollars.

Still with me? OK. Here’s where things get a little contradictory.

If you’re mining Bitcoin to make returns in Aussie dollars to maximise returns for shareholders, you have to sell Bitcoin. That means you have to sell it back to dollars, back to fiat money. That’s pretty straightforward.

But the whole purpose of Bitcoin is not to peg it to a fiat currency. Not to sell it back into any kind of dollar. Its whole origin is as a decentralised unit of exchange over the internet.

The bigger picture when it all began was to have a world where you would buy and sell goods in Bitcoin. You could get your income in Bitcoin even. The whole idea was to wrest control away from government cronies and to have no restriction on where you could or couldn’t use it.

The way I see it, if you become a publicly traded Bitcoin mining company you completely fly in the face of the whole point of Bitcoin.

That indicates to me you don’t believe in the bigger picture of Bitcoin. And by intrinsically having to peg it back to a fiat currency, you’re helping to destroy its very purpose.

So if you’re one of those people, like the Prime Minster of Australia, who’s investing in Bitcoin Group, be aware of the high — the very high — risk.

Of course, whether you choose to invest in this ASX IPO is entirely up to you.

But do your research and understand what’s really going on. At a bare minimum understand what Bitcoin is and its intention. And only then should you make a decision.



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Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

He’s not interested in boring blue chip stocks. He’s after explosive investments; companies whose shares trade for cents on the dollar, cryptocurrencies that can deliver life-changing returns. He looks for the ‘edge of the bell curve’ opportunities that are often shunned by those in the financial services industry.

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