Add Longfin Corp (NASDAQ:LFIN) to the lengthening list of companies that are getting into the cryptocurrency craze. And add LFIN stock to the list of cryptocurrency stocks that have gone ballistic simply because they’ve tapped into the craze.
Since announcing last Friday that it had acquired cryptocurrency player Ziddu.com, the LFIN stock price has soared a stunning 1,100%.
As impressive as the move has been — and as rewarding as it has been to some lucky traders — it’s time for everyone to acknowledge what’s going on here. Longfin is a completely legitimate company, offering foreign exchange and financing solutions to small business. The addition of Ziddu.com to the mix, however, only catapulted LFIN stock higher because Bitcoin mania has raced out of control.
All of us should also start to acknowledge we know how this is going to end … with a similarly-stunning meltdown.
Longfin: This Is Getting Out of Control
The rise of Bitcoin and all of its cryptocurrency cousins has been, to call a spade a spade, uncomfortably shocking.
The notion of a purely digital means of conveying value isn’t a surprise; it was only a matter of time before it happened. Even outfits like IBM (NYSE:IBM) are developing blockchain technologies, which are what make all cryptocurrencies work.
No, the surprise is that a completely arbitrary currency like Bitcoin or Ethereum or any of the dozens of now-common digital currencies are being viewed in such a light of legitimacy, and being snatched up with a frenzy by individuals who don’t even really know what they’re buying into.
The mania has now spread not just to digital currencies themselves, but to organizations that are simply somehow linked to Bitcoin and the like.
Ziddu.com Ziddu “coins,” for instance, are simply an intermediary currency, serving as a means of transacting business between parties that may want to use different crypto-currencies.
In other words, Ziddu coins are more of a contract than a currency … at least for the time being. That’s fine — there is likely to be some money in the business model. There’s unlikely to be enough money in it to justify the stock’s meteoric rise though.
LFIN stock, which only became a publicly-traded equity on Wednesday of last week, wasn’t on many radars until Friday’s Ziddu news was released. That’s when the stock jumped from $5.38 to more than $60-per-share.
Clearly the premise alone is good enough for some investors for now.
An Ugly End
Make no mistake though. All cryptocurrencies face one major shortcoming. That is, their values are based on nothing more than buyer and seller perception.
That’s in stark contrast to traditional, government-issued money … fiat or otherwise. Although currency values can and do fluctuate, they’re clearly influenced by the relative value of other country’s currencies. Those other currencies are ultimately supported by the strength of that country’s economy, and its stability. The supply/demand dynamic is constantly changing, but it’s rooted in tangible, measurable ideas, with a finite supply, keeping currency values stable and predictable.
Not so with cryptocurrencies. While there is a limited number of Bitcoins that can be mined, there is no limit to the number of cryptocurrencies that can be created (since it’s not regulated), and the only thing driving the value of Bitcoin on any given day is how badly traders want in.
And that desire to be in Bitcoin, Ethereum or any other digital currency is, sadly, mostly the fear of missing out on something that has somehow captivated the world.
Even Longfin’s CEO Venkat Meenvalli, doesn’t think the rapid rise of LFIN stock makes much sense. He commented this week, “It’s crazy, frenzied speculation on the cryptocurrency announcement, which we never expected. The fundamentals will slowly show, but this is crazy trading and has nothing to do with the company’s fundamentals.”
Bottom Line for LFIN Stock
None of this is to suggest LFIN stock is a bad trade. It may well move higher before cryptocurrency enthusiasts realize there’s not a lot of reason for the rally; any time you can sell something at a price greater than what you paid for it is a good trade.
When all is said and done, however, this mania — largely driven by amateurs — is going to loom reminiscent of the Dutch Tulip Mania between 1634 and 1637. At one point people were putting their entire life savings into buying what they thought were increasingly rare and wildly value tulip bulbs. As it turns out, they weren’t all that rare or valuable. The hype just made them seem that way. Too many people financially ruined themselves.
In other words, if you’re feeling the urge to take what profits you’ve got on LFIN stock, you’re not crazy.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.