Are blockchain stocks the next big thing for investors? Analysts think not. They smell another speculative bubble.
Blockchain-related stocks went on a wild roller-coaster ride last week, triggered by a surprise push for the technology by e
But profitable application of blockchain is years away, analysts say, and no publicly listed leaders have emerged in a hot sector filled with promising but unproven start-ups.
“It’s too early to make an investment decision,” said Yang Delong, chief economist at Shenzhen-based First Seafront Fund Management. “I’d wait to see more solid applications take place first. Those speculative bets will only fall back after the short-term hype.”
An October 25 media report that Xi had said China needs to more rapidly develop blockchain technology set off an investor stampede last Monday into listed companies with even a hint of connection.
The East China Money index tracking 172 mainland-listed companies that develop or use the technology shot up 8.1 per cent, with 107 of the component companies hitting the daily 10 per cent upside limit in China’s main boards.
One Shanghai-listed company – property developer Xinhu Zhongbao – surged more than 60 per cent over the week, hitting the 10 per cent upside limit on China’s main exchanges on five straight days. It has a big stake in a private company whose chairman had wowed Xi and other officials about the potential for blockchain.
Regulators acted fast to keep them in check. By Friday, more than a dozen companies had filed “clarifications” to warn investors that the technology would have a small impact on their businesses.
Of the 109 blockchain-related stocks tracked by data provider Wind, only 59 held onto weekly gains by Friday, including Xinhu Zhongbao.
Trading of such stocks on Tuesday accounted for 13 per cent the total turnover in the A-share market, where traders love to pile into hot stocks of the day, driving their share prices up, and then bagging quick profits and scramming. Similar frenzies this year have been seen in companies linked to hemp and rare earths.
The blockchain frenzy quickly reverberated in Hong Kong.
Pantronics Holdings, which was acquired by cryptocurrency exchange Huobi, surged on Monday by 20.8 per cent, only to fall 11.3 per cent Tuesday, 4 per cent on Wednesday and trade flat the last two days.
Grandshores Technology, which describes itself as a construction and blockchain business, shot up 18.60 on Monday, only to fall the next three days and trade flat on Friday.
“Don’t look back and linger when you sell. None of the fundamentals in the
sector has changed,” Xing Zhongheng, a full-time investor based in Shanghai who focuses on telecoms, wrote on stocks investment forum Xueqiu. “It’s going to take years for the real leaders of the industry to emerge and generate earnings.”
Blockchain is a record of information managed by a network of decentralised computers worldwide. Any change of data is validated by a number of computers and stored across the network, so no computer can manipulate the information.
It is the underpinning technology for cryptocurrency such as bitcoin, which relies on it to verify the transfer of funds.
The biggest advantage of blockchain is that it is built to record information in a permanent and unalterable way.
That makes it a natural match for the financial sector, where a lot of resources are spent building trust and ensuring accurate information in transactions.
Analysts watching blockchain say it has enormous potential. But no clear leading players have emerged for investors, in the way that they have in 5G, for example, or artificial intelligence.
Rao Yibo, 29-year-old founder and chief executive of fintech start-up Shenzhen Intelle-Chain Technologies, is hoping to develop a blockchain-based service that can help smaller investment companies skip traditional securities trading intermediaries, such as clearing companies, to reduce costs.
“We found out there’s demand for it when we were working with some overseas funds. To smaller financial institutions, the cost of clearing and payment is one of their core expenses so they’d benefit a lot from enhanced efficiency in this regard,” Rao said. “If we can popularise blockchain to the wider market, then the costs in the whole financial system will decline drastically.”
Other blockchain applications in the financial sector include digital currency. China is the world’s first major economy experimenting with creating its own digital currency, partly as a way to reduce the country’s reliance on the US dollar.
Companies are also developing it to facilitate easier financing and faster turnover between companies in the same supply chain. Shanghai-listed Sichuan Hejia is a leading company in this area, analysts at Guosheng Securities said in a report last week, as it already has recorded 176,000 transactions between suppliers and purchasers on its blockchain.
Like Xinhu Zhongbao, Sichuan Hejia trades on the Stock Connect.
Tencent Holdings, China’s online gaming and social media giant, has entered the field, too. It launched the first blockchain-based electronic invoice system in partnership with the Shenzhen government more than a year ago, to improve the authenticity and efficiency of traditional paper-based invoices.
Zhao Liangbi, telecoms analyst at Guotai Junan, however pointed out that such applications have yet to reflect substantially on listed companies’ earnings.
“We haven’t seen a perfect example of the full utilisation of blockchain technology. What we are seeing now are all primitive forms of the applications,” said Zhao.
More than 95 per cent of blockchain-related companies are early-stage start-ups just going through the first few rounds of fundraising, according to the Guosheng Securities report.
Entrepreneur Rao, who is preparing to raise an angel round funding of about 3 million yuan this month, agreed.
“There is still huge room for the technology of blockchain to develop before it can really change the industry and be adopted by established financial institutions,” he said.