The tale of two extremely exotic assets

The recent financial turmoil has had an impact across most asset classes. The cryptocurrency bubble has burst. By some estimates, over 99 per cent of crypto-coins have been wiped out in the last six months, and are experiencing zero trading volume. The Initial Coin Offering (or ICO) market has gone into hibernation, or perhaps, gone extinct, with no new crypto-coins being offered.

Only a few cryptos such as the venerable bitcoin, ripple and ethereum seem to be surviving and even these have seen huge price corrections. Bitcoin, for example, is now trading at $6,225. A year ago, it was trading at $20,000, and analysts were confidently predicting prices in the $100,000 range.

One follow-on is that there is less interest in blockchain technology. A year or two ago, hundreds of unrelated businesses were tom-tomming the “blockchaining” of their respective operations, and blockchain technology start-ups were generating huge revenues.

That enthusiasm has faded, although few analysts will take as extreme a position as Nouriel Roubini, who dismisses blockchains as “glorified excel sheets”. Of course, if there is a revival of interest in the ICO market, blockchain developers may make a comeback as well.

It remains to be seen if cryptocurrencies are on their deathbed, or merely in the ICU. It is quite possible that there could be a revival of interest in the cryptos that survive this round of blood-letting. However, the second time around, investors are more likely to be cautious and regulators will also have a better sense of what needs to be done to manage this parallel currency.

Interestingly, there is now a bubble building up in another, extremely exotic asset class. That is cannabis (also known as marijuana, ganja, charas, hashish and bhang). As the drug becomes legal or quasi-legal, across much of the world, the agro-companies that produce and distribute it, and the other businesses associated with its value chain, have been seeking and receiving large investments.

There are dozens of cannabis companies either listed or seeking a listing, on stock exchanges in the United States and Canada. They all need money to scale up operations. The industry has grown at warp speed, as it has legitimised.

In 2014, the legal US cannabis market was estimated at $2.7 billion in revenues. By mid-2018, it had crossed the $6-billion-mark. Some of that is genuine organic growth (pun intended) while some of the apparent growth has come from formal legalisation of previously illegal activity.

The drug is currently legal only in 33 of US’ 50 states. There are projections that revenues could hit $50 billion if the federal ban is removed. Moreover, the more ambitious growers are also looking at opportunities in other regions where the drug has been recently legalised.

Some American businesses are listed on the Toronto Stock Exchange and there are also Canadian firms listed on the NASDAQ, and even on the fuddy-duddy old New York Stock Exchange. The valuations of listed cannabis firms have gone through the roof. There are investment bankers specialising in funding this new, high-growth sector and lots of merger and acquisition activity as well. There are many US and Canadian firms trading at valuations exceeding $1 billion — some are at valuations exceeding $5 billion.

Canada is likely to be the next big market. While medical marijuana has been legal in Canada since 2001, recreational marijuana will be legalised across Canada this Maha-Asthami (Oct 17, 2018).  The industry is gearing up for the big push required to build distribution chains and warehouses as well as developing the necessary branding, packaging, and marketing skills to sell to discerning recreational users.

There is a connection between the drug and cryptocurrencies. Cryptos are often used to pay for marijuana (and other drugs) on the Dark Web. But that connection is likely to become more tenuous as the cannabis industry goes legit. It’s fascinating to watch a bubble in a virtual asset being replaced by a bubble in an asset that literally goes up in smoke.

Twitter: @devangshudatta