Every new trend inevitably hits growing pains, and two of the hottest trends in investing are certainly not exceptions.
From small trial programs in a small handful of states, medical and recreational cannabis has grown at a blistering pace. There are now 28 states that have legalized medical cannabis, and eight states with full legalization.
Within about a year, all of Canada will fully legalize, and a slew of countries are either about to implement or are exploring medical or recreational use, including Mexico, Germany, Brazil, and Australia, to name just a couple of the larger ones.
The North American cannabis market posted $6.7 billion in revenue in 2016, up a full 30% from 2015, according to a recent report from Arcview Market Research.
And that phenomenal growth isn’t an outlier. Arcview projects sales to grow at a compound annual growth rate of 25% through 2021.
The cannabis market is growing as fast as Internet companies were in the 2000s.
Within four years, it’s expected to be a $20.2 billion market.
All of this has come about in a matter of years.
Then there is Bitcoin. The cryptographic and digital currency is approaching 10 years of existence.
From a small group of ardent supporters and hobbyists of sorts, there are now 16.4 million of the absolute cap of 21 million in circulation.
All told, there are over $44 billion worth out there now.
Yet both faced similar problems: Figuring out the infrastructure that allows businesses and individuals to buy and sell them efficiently.
That is rapidly changing, and the cannabis market is finding a solution to one of its few remaining major problems thanks to Bitcoin.
Giant Piles of Cash
Bitcoin has the advantage here. Not only is it digital and only requires an Internet connection, it also exists in a completely gray zone. Nothing stood in its way except attracting users.
Today they are accepted by well over 100,000 companies, including far too many major companies and online retailers to list. Security is robust now that early, amateurish players have been left behind.
It is no coincidence that major banks are very interested in digital currencies. The blockchain technology is considered a modern marvel by modern finance. Banks are studying how to use it to revolutionize transactions and security.
In a world where the word “innovation” is so watered down that apps that match you with someone that will pick up a cheeseburger for you at midnight qualify, Bitcoin is the real deal.
Cannabis companies have a much harder road to travel. The sector had to overcome prior bans through referendums, state laws, and court cases. It now enjoys relative safety.
First there is the Rohrabacher-Farr amendment, which prohibits the use of federal funds to interfere with states’ implementation of their own state marijuana laws.
There is a Ninth Circuit court ruling that prohibits pursuing enforcement of the federal Controlled Substances Act against individuals operating marijuana businesses in compliance with state law.
However, there are still the pesky problems of businesses that have to operate in the real world. Cannabis companies have to grow a product, securely ship it, and pay rent, payroll, and insurance.
All of the problems of small- and medium-sized businesses apply, with a couple extra layers of regulatory compliance.
Yet they have to do this with limited, if any, access to payment processing and large national banks.
And so they accumulate giant piles of cash, which they must use for every expense. And at greater expense, due to the expensive armored car services required.
Plus they can’t accept credit or debit card transactions, in an increasingly cash-free economy.
This is where Bitcoin presents a novel solution.
Start-Up Solutions
Cannabis companies are now turning to Bitcoin in an effort to get rid of all that cash and open up new forms of payment.
At least two fintech start-ups are up and running to use Bitcoin as an intermediate step to allow credit card transactions for cannabis purchases — POSaBIT and SinglePoint Inc.
As Jon Baugher, co-founder of POSaBIT, told Bloomberg recently, “There’s no industry — whether it’s the production and sale of cannabis or the production and sale of a cup of coffee — that can operate safely, transparently or effectively without access to banks or other financial institutions and traditional services. That’s where we thought we could leverage the use of digital currency.”
The example he cited is Trove Cannabis, a Washington state store. It sold $3 million worth of cannabis last year, all in cash, and does close to 3,000 transactions weekly.
Since adopting the POSaBIT system in February, Trove customers are given the option to pay with a card. They use an ATM-style kiosk to put the amount of Bitcoin equivalent to the value of the cannabis they want, plus a $2 transaction fee.
When the purchase is processed, POSaBIT then sends the value in U.S. dollars of the sale to Trove’s local bank account.
Not only does this reduce the security risk and cost of handling so much cash for what is essentially a small business with low margins, it also drives extra sales.
About 13% of customers have chosen to pay with credit or debit cards where POSaBIT kiosks are installed, and they tend to spend more than cash-paying customers.
It is a small step, but it tackles a major access problem, and fintech and banking services are converging on the solution.
SinglePoint, for example, just signed an agreement last week with First Bitcoin Capital Corp. to develop a solution for cannabis and other high-risk industries without access to traditional banking.
The Rapidly Maturing Market
All of this points to the cannabis market maturing, and finding solutions for the few remaining hurdles that separate it from more traditional retail operations.
And this is just for the front-facing portion of the businesses. Behind the scenes, financial issues are rapidly being addressed by innovative new models as well.
Part of the problem with a lack of access to major national banks is the availability of capital to get businesses off the ground, or capitalize on opportunities to capture the explosive growth in market share.
But a new “streaming” model is evolving in the cannabis industry that circumvents the issue entirely.
And while it is new to cannabis, it’s a tried-and-true method that was pioneered with precious metals in the 1990s and early 2000s.
Small companies enter an agreement, offering up future revenue for shares and a percentage of their sales. In turn, they receive the funds they need to grow, and the investors essentially double dip through the subsequent share appreciation and revenue growth their funds enabled.
The legal cannabis market has never had a demand issue, that’s for sure. All of the problems it has faced have been from figuring out solutions for the logistical and financial issues.
Now those issues are being addressed in novel ways that will continue to drive the industry’s growth at a rate that rivals the early days of the Internet boom, all while opening up unprecedented ways for investors to ride along.
