I have no Luddite aversion to fintech. I think it’s an exciting area for investors. Having said that, I’m steering clear of Bitcoin and also avoiding UK fintech stock Supply@ME Capital (LSE: SYME). I’ll explain why in a moment.

More positively, I’ll also discuss a UK stock in the fintech space I think has considerable appeal. I’ll explain what has attracted me to this one, and why I’m watching it carefully.

Not my idea of an asset

There’s a touch of déjà vu about the Bitcoin price right now. Three years on from its massive spike in December 2017, it’s at it again. Only this time, it’s rocketed even higher.

My main problem with Bitcoin is it lacks the credentials of a currency, as it’s not a universally accepted, safe and trusted means of payment, as well as being far too volatile to be a store of value.

If Bitcoin is a new class of asset, it’s one that’s primarily valued by speculators looking for short-term gains from trading on the volatility. And that’s not my idea of an asset.

Why I’m avoiding this UK fintech stock

I’m much more interested in the investment potential of fintech businesses. However, Supply@ME Capital is one I’m wary of.

It’s on the FTSE main market, but has a ‘Standard’ listing, which means disclosure and compliance regulations are actually less rigorous than on London’s ‘wild west’ AIM market. At a share price of 0.494p, and with approaching 33bn shares in issue, Supply@ME’s market capitalisation is £162m. This compares with last reported net assets of less than £1m.

This start-up stock’s fintech platform is designed to offer companies the opportunity to raise cash from their inventory. It says: “Unlike conventional bank funding, the Supply@ME offering is not treated as debt finance on a company’s balance sheet. Rather, it is a ‘true sale’ of inventory.”

Now, international accounting rules are designed to thwart sleights of hand that attempt to turn a financing agreement into a ‘true sale’. Accountants and auditors are required to look at the economic substance of a transaction over its legal form. The fact that “innovative legal schemes” underpin Supply@ME’s ‘true sale’ model is enough for me to say “I’m out”.

Why I’m watching this UK fintech stock

I wrote positively about Augmentum Fintech (LSE: AUGM) in an article two years ago. Like Supply@ME, it’s on the FTSE main market, but has a ‘Premium’ (as opposed to ‘Standard’) listing. At a share price of 127.5p, its market capitalisation is £179m, and it’s a member of the FTSE SmallCap index.

Augmentum invests in early (but not seed) or later-stage investments in private fintech businesses. It currently owns stakes in 18 companies. A one-stop shop approach, providing exposure to a range of exciting fintech businesses, is what appeals to me about Augmentum.

Its shares briefly fell to less than half their net asset value (NAV) in the spring market crash. With so much going on, I didn’t spot it. However, the company spotted an opportunity and bought back its shares at discount prices.

A strong recovery has taken its market value to £179m. This is a 6.9% premium to its last reported NAV of £139.4m plus a subsequent £28m fundraising. Exciting fintech stock though it is, I think this valuation is a bit rich. But I’m watching the shares carefully from now on!

I don’t suppose many of those who got caught up in Bitcoin mania knew much about the technology behind it, its history, or the history of speculative bubbles in general. I can’t say I understand the technology myself, but I do take an interest in history. While I agree with my colleague Alan Oscroft’s debunking of Bitcoin (and other cryptocurrencies) as a new asset class, its history is nevertheless interesting. Indeed, reading about Bitcoin’s origins helped lead me to an investment trust that I think could be far more rewarding than the cryptocurrency.

Distrust of banks

Bitcoin emerged as the Great Financial Crisis was unfolding. The domain name bitcoin.org was registered in August 2008, and in January 2009 the genesis block of Bitcoin was mined. Embedded in its coinbase was the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Distrust of banks and an urge to decentralise was implicit in the launch and technology of Bitcoin. While it has so far struggled to become anything much beyond a speculative token, the banking crisis provided other entrepreneurs with the impetus to develop, or found, new businesses, with the potential to disrupt the established financial system.

Augmentum disruptum

In 2010, “a well-networked, experienced team of entrepreneurs and investors who have been both sides of the fence” founded Augmentum Capital, with the backing of veteran financier Lord Rothschild’s RIT Capital.

Their aim was to seek out and invest in exceptional private Fintech businesses, disrupting the banking, insurance, asset management and wider financial services sectors. Last year, the group launched an investment trust, Augmentum Fintech (LSE: AUGM), raising a total of £94m at 100p a share.

Management is focused on businesses they believe have the greatest potential to deliver exponential growth on the capital invested. The trust’s initial portfolio consisted of stakes in the following five businesses:

• BullionVault – the world’s largest retail precious metals investment and trading platform.
• Interactive Investor – the UK’s leading flat fee investment platform
• Seedrs – Europe’s leading equity crowdfunding platform
• SRL Global – a monitoring, measuring and managing platform for large family offices, endowments and pension funds
• Zopa – the world’s first peer-to-peer lending platform

Since launch, the number of investments has increased to 13 — approaching the trust’s target of 15 to 20.

I think Augmentum has a strong management team, and I like its intense focus on a concentrated portfolio in the exciting Fintech space. This is not the sort of trust I’d want as a core holding, but I’d be happy to buy a few shares for its spicy high-growth potential. As for Bitcoin, count me out.