Investor Alert

New York Markets After Hours

Market Extra

Nov. 27, 2017, 5:09 a.m. EST

Here’s one thing the bitcoin frenzy has in common with the dot-com bubble

Shares of companies that change their names to include the word ‘blockchain’ see big boosts

By Anora M. Gaudiano, MarketWatch

Bitcoin is ballooning to new highs. but can it last?

Whether bitcoin is in a bubble may be up for debate. But there is one thing about the cryptocurrency craze that is reminiscent of the late 1990s tech boom.

Companies that put the word “blockchain” or other cryptocurrency terms in their name have seen their share prices soar, much like companies that added a dot-com to their name received an almost automatic boost about two decades ago, according to Raghavendra Rau, professor of finance at Cambridge Judge Business School in the U.K.

That is what happened to the stock of small, U.K.-listed On-Line PLC . On the last Friday in October, the stock surged 173% to 47 pence—all apparently in reaction to the firm announcing plans to change its name to On-Line Blockchain PLC at its next annual general meeting.

It isn’t surprising to see Wall Street getting jazzed up about blockchain or bitcoin over the past 12 months.

The price of bitcoin itself (COINDESK:BTCUSD) , the most prominent cryptocurrency that uses blockchain technology has risen nearly 650% year to date to a record high of $7,300. Meanwhile, the second-most prominent cryptocurrency Ether is up 3,800% to around $300 since the start of 2017.

Soaring prices of bitcoin and increased attention in cryptocurrencies from average folk, professional investors, and regulators alike, have compelled a number of companies like On-Line PLC—hoping to piggyback on the ascendance of the digital currencies and blockchain technology—to either change their names, reshape their business models or both, to underline their links to crypto assets. Those moves are drawing parallels to the late-1990s dot-com boom.

“There is nothing new under the sun. These manias spread every few years when new technologies appear with uncertain potentials,” Rau told MarketWatch.

“It happened for airlines during the 1920s, it happened during the dot-com boom, it happened during the China boom and it is happening again with blockchain. And this time too, it’s not different,” he said. Blockchain refers to the digital record-keeping technology that underpins bitcoin and other cryptocurrencies.

Rau was one of the co-authors of a paper published in 2000, entitled “A Rose.com by Any Other Name,” in which a trio of finance professors found that companies that made internet-related dot-com name changes saw a “striking positive stock price reaction” to the announcements.

“Investors, especially unsophisticated investors, pay attention to salient news and react immediately without checking details. And in markets that are not extremely liquid, the effect persists because no one takes the other side of the trade to bring prices down again,” Rau said.

According to FactSet data, there are 38 companies that have “bitcoin” or “blockchain” in their names, most of them private.

The four crypto-related entities that are publicly traded all changed their names in 2017 or late 2016:

Carrus Capital Corp. became Global Blockchain Technologies Corp. ; Leeta Gold Corp. converted in to Hive Blockchain Technologies Ltd. (TSX:CA:HIVE) ; BiOptix Inc. switched its name to Riot Blockchain Inc. (NAS:RIOT) ; and JA Energy transformed in to UBI Blockchain internet Ltd. (OTC:UBIA)

Share prices of three of the quartet have seen triple- or quadruple-digit gains since the start of the year.

A cursory analysis of income statements from these publicly traded entities, however, show they have little or no revenue as of the latest reported quarterly results.

In the case of Canada-based HIVE Blockchain, the company back in September took over a publicly traded company, in a so-called reverse merger, sometimes used by private companies to bypass the process of listing on public exchange. In this case, Hive bought a shell company that was formerly tied to gold-mining. Now, it mines bitcoin instead.

Hive raised $7 million in October through a private placement of 4.66 million shares at C$1.50 each.

The stock of the shell company was trading around 14 Canadian cents until May when it began to climb. By the time Hive completed its reverse merger, it was worth 75 Canadian cents. As of Thursday, it was trading at C$5.01, surging a staggering 3,600% year to date.

In an email to MarketWatch, Hive said that the company “is currently an infrastructure provider to the blockchain and we currently own and operate two mining facilities in Iceland.”

Rau said comparing HIVE with Facebook Inc. , using the social network’s valuations when it went public in 2012 at about 62 times trailing earnings, would imply that HIVE should earn about $13 million in net profit to justify its current value.

Click to Play

Bitcoin: The World’s Most Dramatic Bubble Ever?

Investment manias throughout the centuries have ranged from tulips to tech stocks to housing; is bitcoin different? Image/Video: Daniel Epstein

Another sign of growing demand for cryptographic assets is the skyrocketing popularity in so-called initial coin offerings, or ICOs, which have become a popular way to raise capital, outstripping traditional venture investing and drawing the ire of regulators. Those regulators have warned of the risks of investing in untested, virtual assets for mom-and-pop investors.

According to Coindesk.com, more than $2 billion has been raised in ICOs in 2017, outpacing early stage venture capital funding.

Also see: ‘Bitcoin is a bubble,’ says the head of the world’s largest hedge fund

Yale economist and Nobel laureate Robert Shiller, author of “Irrational Exuberance,” Robert Shiller, told Quartz recently that bitcoin was the best example of a bubble.

The lesson from that dot-com boom and then bust may be that companies with zero revenues and insane valuations may not live up to the hype. However, judging by soaring stock prices of blockchain-related companies, it appears that investors may be willing to take the chance—for now.

This article was first published on Nov. 2, 2017.

Link to MarketWatch's Slice.