Case Study: Cryptocurrency Investment Risk at OTC Pink Exchange

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(Last Updated On: September 11, 2017)

I love innovation. I am usually the first adopter of new technologies. The first fifteen years of my career I have been working as a software engineer in R&D developing new, cutting edge products that would see a customer several years after I am done writing the code for the first release. I started my new career path as a startup advisor for technology companies about five years ago. I am also an active trader usually sticking to swing trading style. With my passion for disruptive technologies, innovative business models, and equity trading, it is not a surprise that I would very interested in cryptocurrency.

Cryptocurrency Industry is still in Very Early Stages of Development

As a startup advisor, I wish all startups would achieve exponential, hockey stick growth, reach millions of customers and have IPO (initial public offering) one day. Similarly, I wish that all FinTech startups that are developing new solutions or cryptocurrencies on top of the blockchain would be wildly successful. Unfortunately, there are many bad apples in cryptocurrency industry. I am very disturbed to see so many bad apples exist in this field worldwide, because they give the bad reputation to the majority of the honest players who truly work to disrupt financial industry and lower banking costs for the masses. The reason why I am writing this brutally honest blog is because my emotions are still bruised from the close encounter with one bad player. I have lost most of my investment with publicly traded OTC (over the counter) company that develops and trades cryptocurrencies. Even though I lost insignificant amount of money, I am upset at myself for letting my emotions take over the brain and made a bad bet. I hope that my experience teaches other people not to make the same mistakes.

Why and How I Bought $BITCF 

As an active trader, I constantly have my broker’s web page opened on my computer. Part of my daily routine is to check the market status at the opening bell at 9:30AM, observe the value change of my portfolio, read the significant news that move the market, and get the sense of the general market trend for that day: upward, downward or flat. I also like to check out my favorite screen, the most orders placed by Fidelity customers to see what other people are doing that day. For the most part, other retail traders are buying and selling stocks that are currently in the news, or the common volatile leveraged ETFs.

On August 14, 2017 I visited my favorite Fidelity’s screen, top orders by customers. When I saw the top 10 list for that day, my heart immediately started racing! Among top ten were $GBTC and $BITCF! I new these two tickers well, I was pinning for $GBTC (Bitcoin Investment Trust) to be available to retail investors, so the adrenalin rush immediately took over my brain. All I could see in my head was the big fat Bitcoin sign. Bitcoin on Fidelity! Bitcoin for regular people! Bitcoin! Bitcoin! Where do I click? Where’s the BUY button? Greedy for Bitcoin

Which one to get $GBTC or $BITCF? I know what $GBTC is, so this $BITCF sounded more appealing because of my bias for anything new. I read a brief, one paragraph description on $BITCF (it is gone at the time of the writing of this blog). The company, First Bitcoin Capital Corporation, Inc is not only mining, not trading, Bitcoin, but also developing new cryptocurrencies. Wow! Innovation! In my book, that’s so much better than only trading Bitcoins, like $GBTC does. SOLD! I did zero due diligence on this company before I decided to purchase its shares. Yes, I know, I broke all the rules of the trade. But, the vision of having Bitcoin in a retail trading account was so powerful that I shut down any rational thinking at that time. For few moments, I experienced a gamblers’ rush. How many shares should I buy? 500 shares sounds good; that would be little over $1,000. Hey, my brain is still fighting my emotions as my brain did not let my gamble significant amount of money. My typical swing trade purchase is significantly higher than $500. However, greed joined the party. Greed said that if the stock goes up 20-30%, which is very common daily volatility for any cryptocurrency, then I would not make much of the profit. So, greed made me increase my gambling size to 1,000 shares, costing me $2,700. The pulse returns to normal when 1,000 $BITCF shares appear in my portfolio.

Trading Pattern that Lead SEC to Intervene 

Emotions have won the battle, but not the war. What have I done?! Now, after the fact I start doing due diligence on First Bitcoin Financial and I do not like what I see. As a startup adviser always on the lookout for a good company, I have seen countless pitches and helped others improve their pitch and business model. Because I can quickly see through overinflated egos of some startup founders, it did not take me a long time to get really concerned about my investment choice.

By the end of the trading day that ended with incredible 80% jump in $BITCF shares, the company has issued a press release warning investors about “irrational exuberance”. Although management greatly appreciated investors’ interest in the company, they also want to remind people that there is no such thing as a secure investment:

“August 14, 2017 Vancouver BC, (OTC MARKETS) First Bitcoin Capital Corp (OTC:BITCF) announces that management is concerned that demand for its common shares has reached unrealistic heights. While the company believes that it is the well established leader of all microcap public companies focused on the revolutionary blockchain technologies, and has achieved far greater progress above its public competitors, the exuberance for not only our common shares but for that of all in this space is far outpacing performance and realistic expectations. These expectations seem premature if not unjustified.”

The next day, a skull appeared next to $BITCF symbol on OTC market. A skull icon, is also known as “caveat emptor”; or in plain English, something really shady is going on right now. Interestingly, the appearance of the dreaded skull, caveat emptor symbol did not crash the stock, as on that day 8/18/2016 $BITCF has reached the bottom and it reversed its downward trend. The share price is now steadily going up and retail investors, aka regular people are happy. In retrospect, that was a probably a good day to get out at around $1/share, simply break even or lose some money. 

Just few days later, SEC has decided to step in and suspend trading for BITCF on 08/24/2017 through the end of the day of 09/07/2017. GAME OVER! In the cryptic letter to the public, SEC wrote:

The Commission temporarily suspended trading in the securities of BITCF because of concerns regarding the accuracy and adequacy of publicly available information about the company including, among other things, the value of BITCF’s assets and its capital structure.

Always Read the Balance Sheet Statement

Oh boy! SEC is concerned about accuracy of the company’s assets. I have not even read last quarter’s financial statements. Shame on me. I guess I will read them now. Fidelity, my first source of information did not have any links to financial statements for this company, which is highly unusual. BITCF Press ReleasesI go to OTC web page, but they have removed all  information too, because of the SEC trading suspension; all I could see is dreaded skull symbol. I go to First Bitcoin Capital web site itself to fish for financial statements, so I can finally do due diligence in order to evaluate the probably of losing all my money. Let’s dig into the last report published on May 2017 for the 2Q2017 and red flags:

  • Cash on hand is the only item listed under current assets on the balance sheet. $5,887. No, that is not a typo. This publicly traded company has reported five thousand eight hundred eighty seven dollars in cash. My dear reader, I bet my house that you have more than that in your bank account.
  • Cryptocurrencies represent the only long term asset. They have spent $360,000 (three hundred sixty thousand dollars buying or developing crypto coins).
  • Revenue for the 2Q2017: $22,763.00, expenses $15,430. There’s not much left for profit from operations, $7,333. There is no mention of the expense for salaries or the office space even though the company proudly showcases it’s management team that apparently works for equity.
  • The company is showing financial statement on the web site, but no one can download, copy or print the PDF file. That’s very strange too.
  • The company has issued little over 300M common shares. At the time of the SEC suspension, the share price was $1.79. So, 300M * $1.79 represents $537M in market size! Now, you tell me, my dear reader if the company with less then $6k in cash, with $22k in revenue deserves $500M enterprise value? Think about this for a moment and place your traders accordingly.

Two Weeks Long SEC Trading Suspension 

Following SEC suspension, the company has issued a condescending press release to its shareholders basically claiming the SEC is clueless about the huge potential of cryptocurrency:

We have been very busy generating more than 100 unique cryptocurrencies ranging from disrupting the air-miles-loyalty industry to providing solutions to the cannabis industry. One of the beautiful aspect to our business model is the transparency that blockchain provides.  For example below in the About us section you will find links to our three main OMNI wallets.

OK, I’ll bite. The company is spinning new coins on the blockchain all the time, so the value of these new coins would depend on demand. This company has launched a number of coins, including TeslaCoilCoin the will be used to pay dividends to current shareholders.

At the time of writing of this blog, I have used AltCoinMarketCap.com web site to determine  the market size of the coins launched by First Bitcoin Corporation. Heck, maybe the market sizes will add up to millions and millions of dollars. Let’s see:

Coin

Ticker Market Size Link

President Clinton

$HILL

$0

https://www.altcoinmarketcap.com/show/president-clinton

President Johnson

$GARY

$0

https://www.altcoinmarketcap.com/show/president-johnson

President Trump

$PRES

$0

https://www.altcoinmarketcap.com/show/president-trump or https://coinmarketcap.com/assets/president-trump/

President Sanders

$BURN

$0

https://www.altcoinmarketcap.com/show/president-sanders

TeslaCoilCoin $TESLA $0 (Ƀ 0.0001845) https://www.cryptocompare.com/coins/tesla/charts/BTC or https://coinmarketcap.com/assets/teslacoilcoin/

Internet of Money

$XOM unknown

Doesn’t exist yet

So far, the coins created by this company amount to one big fat zero. However, the management simply does not give up on playing on people’s greed and ignorance by offering shareholders to switch their shares to completely worthless coin that no one trades yet:

The Company’s counsel completed the contractual paperwork necessary for those shareholders of BITCF that wish to swap each of their 2 shares of BITCF for 1 $XOM.“

Trading Resumes after SEC Suspension

I am terribly embarrassed that I purchased the stock without doing semi-decent due diligence. I admit it. At least I didn’t invest the money that I can’t lose. On the other hand, I spent considerable amount of time doing thorough due diligence on this company when SEC halted trading because my ego was bruised. Because I truly believe in the ability of the blockchain technology to disrupt enterprise scale supply chain systems and the financial market itself, I was digging for the silver lining in the fine print. Unfortunately, I couldn’t find it. The management of First Bitcoin Capital gives other honest players in cryptocurrency a bad name.

I’m out. Done! Here’s the proof:

My BITCF Trades

According to tweets that morning, some people couldn’t place trades at all, and some had to call their broker to place an order over the phone. The volume on 09/08/2017 was very thin, about 1/10th of the average volume over the last month. I can only speculate that the volume was low because no one could see bid-ask spread and because some people could not place a trade at all with their broker. If the history is a guide, most stocks that have resumed trading after SEC halt have lost more than 90% of the value, trading at fraction of the penny.

Cryptocurrency has Few Bad Apples

I hope that my experience teaches other people not to make the same mistakes. Ultimately, we need to educate ourselves better about true potential for cryptocurrency, so we will be able to single out bad apples. Without bad player, the whole industry will grow faster.

Finally, I would recommend buying Bitcoin, Ehterium, Ripple, Litecon or other popular cryptocurrency directly, rather through companies that trade at OTC exchange. If you plan to participate in ICO (Initial Coin Offering, currently banned by Chinese government), please give me a call first to discuss financial viability of the startup you want to support financially.

Buy Me a Coffee with $BTC, $ETH, or $LTC 

I was lucky. $509 still in my pocket can buy a lot of cups of coffee. Many other investors will wake up sooner or later with zero balance. If you are one of the lucky ones, and you have found my story a valuable life lesson, I would appreciate a token of your appreciation. Coins accepted and greatly appreciated:

About Dragana Mendel 85 Articles

Dragana Mendel is a President and Principal Consultant at ANAGARD, LLC. In her role, she provides management consulting services to small and medium size businesses on the best strategy to achieve their short and long term goals.