In recent weeks, we have given considerable attention to Overstock.com Inc. (OSTK, Financial) and its efforts to transform itself from an internet retailer struggling to survive in the shadow of Amazon (AMZN, Financial) into the premier player in blockchain technology.
In our first research note on Overstock, we discussed the strategic efforts to build a range of blockchain technologies, largely through its wholly owned subsidiary, Medici Ventures.
In our subsequent note, we discussed the unusual (one might even call it bizarre) shareholder letter from CEO Patrick Byrne, in which he made a stab at justifying his decision to sell 10% of his Overstock shares, despite the stock trading far lower than what he still claims it should be worth.
In today’s research note, we wed these prior threads in a final comment for the time being. Specifically, we discuss the implications of Overstock’s move into blockchain in the context of the broader development of the technology and growth of the crypto market, and address the question of Byrne’s capacity to lead the company through a successful self-reinvention.
It’s still all about bitcoin
Let’s start by talking about some of the market dynamics in the crypto and blockchain space.
Even as cryptocurrencies proliferate and gain traction, and as blockchain technology more generally sees wider uptake and expanding usage, market perception of the whole space is tied up with a single cryptocurrency: bitcoin.
Bitcoin was the first, and is still by far the most valuable, widely traded and best understood cryptocurrency on the market. Rivals such as Ethereum aim to match, or even supplant, the doyen of the crypto universe, but thus far bitcoin has held its own. That has been the case even through the wild volatility and crash after it hit its all-time high price of $19,783.21 on Dec. 17, 2017. While the crash lost it some relative market share, it has since regained all the lost ground. Today, bitcoin represents a little under 50% of the total crypto market capitalization.
Bitcoin’s first-mover advantage has remained its great strength. Even with all the other cryptocurrencies and tokens out there, it stands as the anchor point of the market – and of all the ancillary technologies. Some of that strength is the product of retail traders, who still see Bitcoin as a “crypto gold standard” of sorts. Options exchanges’ decision to open crypto desks starting with bitcoin has further solidified its place.
But bitcoin’s position as crypto anchor has a consequence: Its fortunes tend to drive perceptions of the whole market. Thus, bitcoin’s price moves tend to move the whole market. Thanks to bitcoin, there truly is no such thing as a diversified crypto portfolio, a lessons some novice traders have learned the hard way since bitcoin hit the skids in 2018.
Byrne doesn’t get it
Trading in bitcoin, and all cryptocurrencies, is driven by irrational psychology. That irrationality has bled out across the entire blockchain universe. Bitcoin has neither concrete power over the technological side of blockchain, nor is its overwhelming market capitalization likely to hold. Yet, it will likely be quite a while before bitcoin’s fortunes do not have an outsized impact on other cryptocurrencies and blockchain-focused, or even blockchain-adjacent, businesses.
Overstock’s Patrick Byrne seems perplexed by the impact of bitcoin on his company’s share price. He even went on a tangent about it during his recent shareholder letter to discuss the matter:
“I am disappointed that I when the deadline arrived for my sales this quarter, the stock had dropped (I sadly note that over the last 180 days the correlation between OSTK’s and Bitcoin’s daily moves has been 85.5%, and again warn people: we don’t have significant holdings of Bitcoin).”
Byrne directly acknowledged the high correlation between Overstock’s stock price and the price of bitcoin. Yet he seemed to either not understand or refuse to acknowledge that the correlation is related to more than Overstock’s holdings (or lack thereof) in bitcoin itself. Bitcoin is, fundamentally, a heuristic for the entire market, including the blockchain technologies that are not themselves cryptocurrencies (or even necessarily connected to any cryptocurrencies or tradable tokens). It may not be fair, but it is the reality of the market.
So long as Overstock plans to bet all its chips on its transition to blockchain technology, it will be painted with the bitcoin brush. Bitcoin is still highly volatile, and that means Overstock may well be too. Byrne needs either to accept that reality or consider a different strategy.
Verdict
It appears inevitable that Byrne’s strategic shift toward blockchain and crypto will, at least for a while, put Overstock’s share performance (and thus recovery prospects) further in thrall to the vicissitudes of the bitcoin market. A CEO operating in this space should be able grasp this fact.
Of course, Byrne can and should work to educate investors, and the broader market, about the wide range of blockchain businesses and why their futures are not bound up with that of bitcoin. But changing that perception will take time, and will likely only really come about as the blockchain and crypto sectors mature more thoroughly. Byrne’s own comment raise worrying concerns about his level of understanding of the market dynamics involved.
What Byrne characterizes as a disappointment should actually be seen as a warning. Overstock is trying to become a big player in blockchain. That means accepting the position of bitcoin in the constellation of blockchain technology and crypto generally. But that can present its own problems for a company trying to fundamentally shift its strategic vision and embark on value-additive growth projects after years of difficulties.
An unmooring of price from improving fundamentals can be a big problem when it comes time to sell the new growth narrative. That puts a serious factor out of Overstock’s control that could blunt its turnaround story.
Disclosure: I/We own no stocks discussed in this article.
