Investors Ride the Upside in Blockchain Ventures, Despite Government Restrictions

Every time a Chinese company ventures into the blockchain market, there's a big stock run-up, as Bitcoin fever continues to prevail.

Ed Newton
    Jan 13, 2018 6:05 AM  PT
Investors Ride the Upside in Blockchain Ventures, Despite Government Restrictions
author: Ed Newton   

Even as Chinese authorities seek to put a lid on Bitcoin fever, with new restrictions on trading cryptocurrencies and a policy apparently designed to strangle cryptocurrency mining operations, a growing list of publicly traded Chinese companies are boldly venturing into blockchain technology ventures. 

In the past week, there have been announcements about ventures in blockchain technology – referring to the vast network of computers that record and oversee Bitcoin transactions -- by at least four Chinese companies. All have resulted in soaring stock prices, as investors continue to be intrigued by Bitcoin and other cryptocurrencies. 

Government restrictions may slow down the trade in Bitcoin - which can now be bought and sold in China only in over-the-counter markets - and shake up the Bitcoin mining industry, but investors are still looking at the upside. 

Meanwhile, government moves to cleanse the financial markets of risk, not just from currency trading schemes but also from unrestricted borrowing, equity speculation, and other activities beyond the norms of monetary business, have not deterred the government itself from spotting the potential profitability of cryptocurrency trading. 

"The People's Bank of China has run trials of its own prototype cryptocurrency, taking it a step closer to being the first major central bank to issue digital money," according to Bloomberg News. 

Any official venture into digital money by the government, however, would be without the libertarian, free-market trappings that accompany most private ventures. 

Still, regulatory pressure is still in play. Authorities have closed all Bitcoin trading platforms in China because, they say, of rampant speculation and scams. ICOs – initial coin offerings – have been banned, and the Office of the Special Rectification Work Leadership Team for Internet Financial Risks has advised Bitcoin mining companies to make an "orderly exit" from the business. There have even been moves to squeeze mining companies by limiting their access to electric power. 

But the entrepreneurial instinct remains active. Mining companies like Bitmain and BTC.Top, drawn initially to China's cheap power and labor, are relocating to other countries, such as the U.S., Canada and Singapore. And Chinese service and retail companies are leaping into the market with new profit-making blockchain schemes. 

One of the latest ventures into blockchain technology by a Chinese company surfaced Thursday, with reports that Secoo Holdings Ltd. (Nasdaq: SECO) planned to launch a blockchain-inspired authentication service on its e-commerce platform. A spokesperson for Secoo, Asia's largest online upscale products and services platform, confirmed the nature of the new venture, but would not supply details. 

There was an initial pop on the news of about 50 percent in Secoo stock valuation, but shares settled down to a more modest increase of 1.6 percent by the end of the day.

Then, ZK International Group Co. Ltd. (Nasdaq: ZKIN) announced yesterday that it had secured a $500,000 equity investment - to be paid all in Bitcoin. The maker of steel pipes said investment was made by Layla Dong, CEO and founder of Blockshine Technology Corp., who paid 34.123 Bitocoins for 62,500 shares in the common. That announcement came two weeks after ZK International announced it received a $520,000 investment from NGST Ltd., a company owned by Antanas Guoga, founder of Blockchain Centre, a shared office space in Vilnius, and Exigent Capital, a firm that specializes in cryptocurrency trading. 

 The List Keeps Growing

Just last week, LightInTheBox Holding Co. (NYSE: LITB) announced that it had begun accepting Bitcoin on both its and platforms. The Beijing-based company, an online retailer with a global market base, added a Bitcoin payment function to its checkout page, with payments processed through BitPay. That announcement prompted a 20 percent increase in share value that day. 

At the same time, online game developer The9 Ltd. (Nasdaq: NCTY) was reportedly planning the launch of its own cryptocurrency on its gaming platform. The Shanghai-based company, which had been under threat of delisting by Nasdaq because its share valuation had fallen below minimum requirements, got an immediate boost on the news. Its shares jumped by more than 31 percent. 

The9 is one of a number of gaming operations that have expressed intentions to use blockchain technology within their virtral communities. These include NetEase Inc. (Nasdaq: NTES), Linekong Interactive Group Co. Ltd., and Shanghai U9 Game Co. Ltd. 

When ChinaNet, an integrated online advertising, precision marketing and data-analysis and marketing platform, announced its move last week into the blockchain industry, the company's shares rocketed upward by 800 percent. The venture developed through a strategic partnership with Wuxi Jingtum Network Technology, an established blockchain developer.

The Industry Clamps Down 

Another player in the bitcoin game has been Xunlei Ltd. (Nasdaq: XNET), a cloud-based acceleration technology company, which announced in November it would begin "exploring emerging blockchain technology." The company released its own cryptocurrency last year, Wanke Coin, inviting speculators to buy in. But the government closed down the currency operation. 

The company got a boost last month, though, when the Chicago Mercantile Exchange, the world's larges futures exchange, agreed to launch bitcoin futures, giving new hope to Xunlei's plans for cryptocurrency futures trading. But on Friday, the National Internet Finance Association of China (NIFA) named and shamed Xunlei's LinkToken, which had replaced its earlier Wanke Coin.

"Xunlei has been promoting its LinkToken through frequent investment conferences and circulating so called 'trading tutorial' to attract innocent investors to buy the token," the NIFA statement said. "All kinds of virtual currencies are deemed illegal and Xunlei's coin is an example of an ICO in disguise."

Finally, there was news from Chinese sources that mobile app developer Cheetah Mobile (NYSE: CMCM) is working on a blockchain-related initiative. 

All of these developments resulted in initial increases in share valuations as well as skepticism from Chinese government officials, who compare the feverish investor interest in Bitcoin to the Dutch Tulip Bubble of the 1630s, and from stock analysts. 

Noted Motley Fools Timothy Green, speaking of a surge of investment in Cheetah Mobile: "All it took was an unconfirmed foreign-language report that mentioned blockchain for speculators to pile into the stock." 

It remains to be seen whether investor optimism – and share prices – will stay up. For now, it appears that any company announcement including the words "blockchain" or "bitcoin" results in a surge of investor interest.