Can DigitalX ride the blockchain hype train?
DigitalX, the only ASX-listed company on the blockchain hype-train, soared in price recently following an investment from a big player in the burgeoning space.
But the technology’s lack of mainstream awareness and adoption, and its associated volatility, means it remains a risky investment.
Blockchain is a technology that provides a public ledger of transactions. Each “block” is like a bank statement that is connected to other blocks to form a chain.
Best-known as the foundation for controversial digital currencies like bitcoin, the technology has reach epic proportions of hype.
“What the internet did for communications, I think Blockchain will do for trusted transactions,” IBM boss Ginni Rometty said recently. IBM markets blockchain services.
Is blockchain the future that will inevitably underpin a wide array of new innovations and services? Or will trust issues and volatility forever resign it to being a cult-like technology?
And can Perth-based DigitalX (ASX:DCC), a startup developing blockchain-based payment solutions, turn the technology into a successful business?
There is no doubt Blockchain has a wide range of applications — everything from identification and voting to financial transactions.
No longer just powering controversial cryptocurrencies, it is a new innovation being investigated and advocated by the likes of the federal government and the ASX.
“We should all be interested in blockchain developments and its potential application, right across our economy,” Treasurer Scott Morrison said earlier this year.
The ASX has invested more than $20 million with software maker Digital Asset to investigate replacing its outdated CHESS system with blockchain technology. This would mean its entire clearing system would be run on a private blockchain network.
The ASX has not yet decided whether it will implement the new system. Some industry insiders are skeptical about whether it will go ahead with the ambitious plan.
A report released in June by the CSIRO’s data innovation group Data61 found that “the adoption of blockchain technologies is still in its infancy” and had a long way to go before hitting the mainstream.
Although the organisation identified a series of benefits for government and the private sector, it also came with unique risks.
Regulators and the likes of the ASX are still a long way from properly accepting and understanding new technologies like blockchain.
Melbourne-based bitcoin mining company The Bitcoin Group attempted to list on the ASX six times from late 2014 to the start of this year, but was blocked at every stage.
The issue centred on the organisation not being allowed to include forecasts for the price of bitcoin in its estimates of working capital.
After multiple failed attempts, the organisation pulled its prospectus, eventually rebranded to The Blockchain Group and invested in the only blockchain-focused company to make it to the ASX — DigitalX.
DigitalX scored a $4.35 million investment, and saw its shares quickly jump by almost 74 per cent to 4c.
Its shares have since settled back to about 3c and a market cap of about $7.2 million.
DigitalX has had its fair share of issues since its backdoor listing in late 2014. The company had only $232,000 in cash and cash equivalents at the end of the last quarter, with the recent investment expected to hit its bank account by the end of August.
DigitalX’s flagship service AirPocket, a platform for remittance payments based on the blockchain, aims to provide secure and cost-effective cross-border payments.
The app launched this year but is yet to find customers, with an “insignificant volume of transfers” so far. The company says it has “not gained initial traction with customers”, and the organisation had revenue of only $22,000 for the June quarter.
DigitalX is experiencing pain because most people don’t understand or trust the technology, says blockchain consultant Alan Tsen.
“It’s a hard space to work in. The technology is nascent and the use cases haven’t really been established. A lot of people have a view as to where the use cases will be, but no-one has proven that out at scale,” Tsen says.
“It’s way too nascent to actually have a listed product that is standing alone.”
The Bitcoin Group’s failed listing attempts have deterred many other startups from going down the same route, and it may be a while before we see other blockchain-focused companies attempting to go public.
“A lot of people have been scared off by the regulatory hurdles of trying to explain it and how it operates,” Tsen says.
“It’s a pretty big challenge still, and companies are concerned about the optics around it.”
It’s likely that the most successful and lucrative companies will use blockchain as the underpinning foundation of a service, rather than the service itself.
There’s no doubt blockchain is coming and that it will reinvent many industries and services.
But it’s still a long way away, and far too early to tell which industries will most benefit.
For now, we’re unlikely to see many blockchain-focused companies opting to list on the ASX and those that do will likely struggle as they wait for the general public to catch up.