The Capital Management Corporation

INSIGHT January 2018

DIGITAL REVOLUTION: &

Just like the Industrial Revolution, today’s Digital Revolution is very disruptive, but can bring great advancements. Some creations will become standard achievements while others will be forgotten. Terms like , Blockchain and are getting a lot of media attention, but their longevity is unpredictable. In an age of rapid advancements, new disruptive technologies can diminish the value of other technologies.

A blockchain is typically a growing list of data or records (called blocks) linked and utilized with layers of secure programming. Blockchain technology (invented in 2008) can be used in many ways, including: processing secure financial transactions, identity management, and storing and sending medical records.

Cryptocurrency is a digital or . The first decentralized (non-government) cryptocurrency, Bitcoin, was created in 2009 and uses a blockchain transaction database.

Cryptocurrencies can be held in a crypto wallet, software programs storing virtual keys to interface with blockchain. This software can be used to monitor, move or make transactions with digital currencies. This “wallet” is like a bank account accessed from an electronic device (e.g. a smart phone, tablet or computer). If the electronic device crashes, goes swimming or gets run over, the wallet may be wiped out. As such, a backup storage device is highly recommended.

It is thought that the movement of many cryptocurrencies using blockchain cannot be traced. This may also make it hard to recover a lost, stolen or hacked wallet. However, the lack of tracing may make cryptocurrencies an attractive option for those trading illicit goods or laundering money.

There are now almost 1,400 cryptocurrencies. Even Russia and Venezuela have developed cryptocurrencies, the Cryptorouble and the .

Excitement in these developments has attracted speculators. Recently, some publicly traded companies have changed their names to include “blockchain” or have made press releases claiming their interest to develop or invest in blockchain technology. Their subsequent one or two-day stock price move may be over 100%. Of course, they tend to have a subsequent decline.

On December 20th, the unprofitable Long Island Iced Tea Company (LTEA) had a closing stock price of $2.44. Then it changed its name to Long Blockchain Corp. Its stock price opened the next day at $7.95 for an overnight gain of 226%. Now trading under the ticker LBCC, it has delayed or cancelled a secondary offering and cannot provide assurance of financing announced equipment purchases.

After opening at $3.10 on January 9th, Eastman Kodak (KODK) announced that through a partnership it would launch an image-rights digital platform using blockchain technology and introduce its own cryptocurrency, KODAKCoin. By the end of January 10th, the stock traded at $10.70 (a two-day 245% gain).

As these are very small companies, when a herd of speculators started a buying rampage, there was not enough stock to buy; consequently, the stock prices surged. Before its name change, Long Island Iced Tea was a -cap (less than $50 million equity market capitalization). Today it is barely a micro-cap ($50-$300 million). Before the KODAKCoin announcement, Eastman Kodak had shrunk to a micro-cap. Today it is barely a small-cap ($300 million - $2 billion). By comparison, the market capitalization of the S&P 500 is about $25 trillion.

If/when crypto currency mania ends, economic risk appears limited. For example, over 95% of all are owned by less than 3% of all Bitcoin accounts. The combined Bitcoin exposure of the remaining 97% of Bitcoin account holders is immaterial to the US economy.

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