Bitcoin survived the launch of its futures by Cboe Global Markets Inc.
Far from being crushed under a much-feared avalanche of short selling, the digital currency is alive and well today and trading at a healthy $17230 on the CBOE futures exchange.
That’s one reason shares in online retailer Overstock.com Inc (NASDAQ: OSTK) perked up both yesterday, when it shot up 22% to close at $55, and today, when it’s quoting at $56, up 1.82%.
Presumably, investors who had bailed from Overstock, or shorted it, as an unlikely proxy for bitcoin, are getting back into long positions.
The other, bigger reason was the news of Morgan Stanley’s disclosure in an SEC filing that it held an 11.4% stake in Overstock, or about 2.87 million shares, as of the end of November. That lit a fire under the stock Monday.
But before going further, I can hear you asking the question “what’s with the picture?”
The feature image is symbolic of the transformation in Overstock’s business model. The furniture display represents the staid, legacy online retailing business – but juxtaposed above it is the green logo of tZERO, the Overstock subsidiary that will launch its Initial Coin Offering (ICO) on December 18. The company expects to garner as much as $500 million from the offering.
If successful, the digital blockchain with be Overstock’s new business mantra, and it may even jettison the retailing business it ran for 18 years, during which it lost $160 million (“I’m embarrassed about that,” said CEO Patrick Byrne on the recent earnings call.)
Overstock.com Inc (NASDAQ: OSTK) Embraces the Blockchain
Overstock was one of the first retailers to allow customers to pay for purchasers using bitcoin in late -2013. It subsequently extended the facility last August to include a lot many digital currencies. About 0.25% of its sales is generated using cryptocurrencies.
In its last earnings report, Overstock disclosed that it held digital currency assets amounting $403,000. It also has investments in various entities in the blockchain and cryptocurrency fields held through its Medici Ventures arm.
But all the above is really small change.
What the company, and the market, is really excited about is the tZERO project being executed by Medici.
tZERO is a distributed ledger technology (Blockchain-based) platform for capital markets. tZERO claims to be the first SEC and FINRA compliant ATS platform that seeks to transform the ICO market with compliant trading and investing. Overstock is partnering with Argon Group — an ICO market maker — and RenGen, who will build the trading platform.
Subscribers to the ICO will have to pay using cryptocurrencies and be issued tokens representing the ownership share. These tokens can be traded on the tZERO platform itself, along with ‘application tokens,’ which are for transacting companies that have been funded by other ICOs.
The platform is therefore a stock exchange of sorts, but instead of stocks, it will trade other ICOs – all the while doing so in regulatory compliance. Token holders will also receive a quarterly distribution of the platform’s profits.
In fact Byrne has a larger vision for the platform – ultimately all stocks will become digital tokens that can be traded instantly and without intermediaries on the underlying blockchain ledger. This could ultimately reduce the current costs of trading by upto 90%. Could this explain Morgan Stanley’s interest in the company?
The tZERO ICO is expected to open on December 18.
Overstock.com Inc (NASDAQ: OSTK): Is there a case for investment?
This will become clearer once the ICO response becomes known.
However, earlier this month, analyst Tom Forte of DA Davidson placed a Buy recommendation and a price target of $85 on Overstock on the reckoning that its current market capitalization of $1.3 billion was far lower than the stand-alone valuation of the home e-commerce business of $2 billion. That business, he said, would be attractive to traditional physical retailers such as Target Corporation (NYSE: TGT), TJX Companies Inc (NYSE: TJX) or Costco Wholesale Corporation (NASDAQ: COST). Calculating the ecommerce business at $58 per share, and the blockchain investments at another $27 per share, Forte arrives at a sum-of-the-parts valuation of $85 per share. At the current price of $56, that means an appreciation potential of about 48%.
What could go wrong?
Blockchain applications are yet to be fully tested on a live and large platform – there could be many a technological slip between the cup and the lip. Full-fledged implementation may be quite some time away, even though the potential of the blockchain cannot be denied.
Another risk stems from the volatile nature of bitcoin and other cryptocurrencies. It is common for their prices to exhibit wild swings from one price extreme to another. If the countless ‘bubble’ claims come true, and the bitcoin price collapses, this could extinguish the prospects of the blockchain and digital currencies.
Also, technological mishaps such as hacking attacks are always around the corner.
tZERO’s platform would have to surpass many regulatory hurdles, and there is no guarantee they will come through. Besides, other, larger Wall Street players may easily muscle in on tZERO’s turf.
Lastly, it is always difficult to assign a valuation to a business entering a new, untested field, in this case a blockchain application, and investors may pay more than what is warranted due to their FOMO (fear of missing out).
Overstock.com Inc (NASDAQ: OSTK) Conclusion
Investors should carefully consider the risks and assess the feasibility of Overstock’s new model, particularly the performance of its ICO.
Investors should also observe the trend in Bitcoin’s price, at least until January, when the first of its futures contracts expire, and by which time the CME Group will also begin to offer its futures product.