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Beware of Tales from the “Crypto-Wizard” and Expensive IPO
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Beware of Tales from the “Crypto-Wizard” and Expensive IPO

Bitzumi Pitches $288 Million Valuation with No Revenue in Crowded Cryptocurrency Market

Before using stocks to bet on the future of cryptocurrencies, investors should do their homework.

That’s especially true of shares in Bitzumi, an upcoming Reg A+ IPO company co-founded by self-proclaimed “Crypto-Wizard” and “Eccentric Millionaire” James Altucher. Anyone surfing the Web for information about cryptocurrency recently may well have seen ads featuring Mr. Altucher, photographed with his signature mussed up hair and crooked eyeglasses. In those ads, Mr. Altucher peddles newsletters and tips on investing in Bitcoin along with other digital currencies – hinting at great riches for those who learn his tricks.

Perhaps riskier than buying Mr. Altucher’s newsletters is owning shares in Bitzumi. The company, which was created in June 2017, calls itself a “digital content and asset platform” that plans to launch a cryptocurrency exchange. The company has no revenue and is selling up to $10 million of new shares at a price of $2.50 each, implying a valuation of $288 million.

Dig a little deeper, and those ambitions look questionable – as does Bitzumi’s implied valuation. Consider the company’s use of funds. Assuming Bitzumi raises its target amount, it plans to use a whopping 40{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of the money on marketing and advertising. Part of that will likely go to more ads featuring Mr. Altucher: The company has a joint venture called Bitzumi Publishing that will market and sell Mr. Altucher’s newsletters (the marketing partner, Agora Financial, also markets dietary supplements, according to an SEC filing). A stated goal is for the publishing venture to “dominate search engine traffic in the cryptocurrency industry” so to attract customers to the planned exchange and to sell more newsletters.

If only marketing magic were all it took. Trust is tough to earn in the crypto-community, with many exchanges failing since alternative currencies came into prominence – some due to fraud. In such an environment, it’s critical to secure licenses to operate and give assurance to financial partners like banks. Bitzumi says in an SEC filing it’s it in the process of obtaining licenses as a money transmitter business, acknowledging that the process is expensive and the timeframe is not predictable. And yet, only 10{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of the target IPO proceeds will be set aside for “licensing and regulatory” expenses.

While Bitzumi remains in an early exchange-development phase, other major exchanges have already invested large amounts of time and money to get regulatory stamps of approval. Coinbase, for example, one of the potential competitors Bitzumi mentions in its filings, already has money transmission licenses in every U.S. state that requires them. Bitstamp, another popular exchange, has a similar license granted in Luxembourg that applies across the European Union and took nearly two years to secure.

Another exchange Bitzumi fails to mention is Gemini, founded by Cameron and Tyler Winklevoss – early Bitcoin investors. Gemini won enough trust to become the basis of settlement prices for Cboe Bitcoin futures, which began trading in December and make it easier for institutional investors to make bets on the currency. Cboe Bitcoin futures are cash settled, just like S&P 500 futures, meaning the final price at the expiration of the contract depends exclusively on one source: Gemini.

To help secure that high-profile status with Cboe, Gemini went an extra mile to become a New York trust company regulated by the New York State Department of Financial Services. Becoming a New York trust company took about two years and makes Gemini a fiduciary subject to capital reserve requirements, cybersecurity requirements, and banking compliance standards as set by New York banking law.

Assuming Bitzumi is able to secure state money transmission licenses, there is much more work to be done to run an exchange successfully. First, it will need to open a corporate bank account related specifically to exchange customer deposits in order to become a link between cryptocurrencies and fiat currencies like U.S. dollars. When a bank opens an account for a digital asset company, it is a major endorsement for the customer because it puts the bank at risk of running into trouble with regulators if something goes wrong.

That means the exchange will need a robust compliance team – similar to one at bank – before opening its doors for business. To satisfy regulators, and in turn bank partners, the exchange must watch the behavior of its customers very closely for signs of suspicious activity – a very expensive process.    

That could be especially hard for Bitzumi if wants to draw hordes of retail investors to its exchange. Many people who decide on an exchange based on paid advertisements are likely to be small retail investors. While it may make sense to attract as many people as possible to a media platform to sell newsletters, attempting the same with a fragile, compliance-heavy cryptocurrency exchange could backfire.

What’s more, even the established exchanges have encountered difficulty when traffic spiked on their platforms. It’s hard to imagine Bitzumi is going to build a better mousetrap overnight. Software development plus R&D account for $1.25 million, or 12.5{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}, of the maximum offer amount, though Bitzumi told RegAResearch it expects more capital to be budgeted in the future to complete and operate its decentralized exchange.

Who will lead Bitzumi’s aggressive charge? Bitzumi’s other co-founder chief executive, Scot Cohen, has 20 years of experience in the finance industry, indicating he’s likely qualified to run a business. But his biography makes no mention of cryptocurrencies and the last several years of his career have been focused on the oil and gas sector.

In an emailed response, Bitzumi told RegAResearch “Bitzumi is in the process of hiring executives with industry knowledge for its management team to operate the exchange and publishing assets. We will publicly announce the team following the close of the Reg A+.”

Meantime, investors are left largely to rely on the crypto-prowess of the co-founders. Mr. Altucher advertises himself as a cryptocurrency genius. But there is no documentation of his credentials in the offering circular and he isn’t an employee of the company – only an advisor. In this interview, Mr. Altucher said he has started 20 companies and failed at 17 of them, indicating a 15{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} success rate. Based on the challenges Bitzumi faces, even those odds look optimistic.

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