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BTCS Inc (OTCMKTS:BTCS) Has Too Many Red Flags

BTCS Inc (OTCMKTS:BTCS) Has Too Many Red Flags
Written by
Chris Sandburg
Published on
July 19, 2016
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Of all the so called disruptive technologies to come over the last decade, none has more potential to turn traditional finance on its head than cryptocurrency. Cryptocurrency, and right now in particular, bitcoin, is threatening to change the way businesses and individuals transact, and investors are looking for an exposure to the shift. Unfortunately, right now, there aren’t many direct plays. One of the few is BTCS Inc (OTCMKTS:BTCS), and it's up nearly 30% so far this week. Don’t read this as positive, however.Basically, the company is in a downward spiral of dilution, and it doesn’t look like there's any way out. So what happened?First, a quick introduction.BTCS started out its life as an ecommerce platform set up to allow people to buy things online with digital currency. It's still up and running here. It has since transformed into what it calls a transaction verification services company, with the self heralded mission of "securing the blockchain". For those not familiar with bitcoin, this essentially means BTCS has a warehouse full of computers all rigged up to each other, working 247 to process bitcoin transactions on the block chain – or mining, to use the native term. There have already been countless companies claiming to mine bitcoin in this way that turned out to be fabricating processing power, but let's assume BTCS isn’t one of these companies.The problem is, there's no money to be made mining bitcoin – well, very little. People are renting properties in the Russian countryside where electricity is very cheap, and scalping profits on huge rigs, but the building pictured in the BTCS corp pres is a North Carolina warehouse, listed here. Add to this the fact that the reward (the BTC that BTCS gets for processing transactions) just halved, and it's an even tighter ask.This is illustrated by the company's financials. Revenues of $200K first quarter 16, net loss of a little over $2 million. Revenues of $155K fourth quarter 15, net loss of a little over $1.6 million. Revenues of $169K third quarter 15, net loss $3.8 million. Essentially, it's costing a lot to bring in very small comparative revenues, and it's only going to get harder as margins tighten. And they will tighten – that's the fundamental nature of bitcoin.All this and we've not even got onto its capital structure. The company's share price crashed throughout June as the result of massive dilution. Here's the explanation:

The Company has previously relied on convertible note financing to fund ongoing operations. As a result of not completing an additional larger round of financing in 2016, the Company was unable to meet the repayment terms of the notes issued in December 2015. This has led to the conversion of almost $600,000 of notes and interest to shares of the Company's common stock.

The collapse was so severe that BTCS has had to strike a leak out agreement stating that holders won't convert more than $7,500 or 5% of common stock traded on any given day. And that's just the beginning. This only lasts until September, however, at which point there will be no limit to the conversion volume (unless the company gets its holders to agree to an extension). Obligations come in at more than $1.5 billion shares, which will hit the market across the next twelve months.$62K cash on hand, $5.4 million short/current long term debt. Increasingly tight margins, an effectively worthless base of shares given the unavoidable future dilution. A merger that has just fallen through to the tune of a more than $2.5 million irretrievable loss to BTCS.This is an interesting industry and a revolutionary technology, and it's going to spawn some billion dollar entities over the coming decades. Unfortunately for BTCS holders, however, this isn’t one of them.Stick with us for BTCS updates by subscribing to our newsletter using the box below.Disclosure: We have no position in BTCS and have not been compensated for this article.

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