Despite a turbulent 2020, one investment stood head and shoulders above all: bitcoin.
The largest cryptocurrency in the world by market cap has more than tripled in value over the drag-12-month period through Jan. 17. It’s up a cool 9,310% over the five-year drag. Bitcoin is blowing almost all other equity investments out of the water, in terms of total returns, since early 2016.
Bitcoin enthusiasts continue to highlight its scarcity – a maximum of 21 million tokens will be mined – and increasing adoption among merchants as reasons for its outstanding performance.
While there are smart ways to get rich from bitcoin, I think there are also three terrible ways to invest in this craving.
There is no shortage of publicly traded cryptocurrency stocks that are riding bitcoin’s astronomical progress to big gains of their own. Cryptocurrency mining company Blockchain riot (NASDAQ: RIOT) is a perfect example. Riot’s shares have soared more than 1,700% in the last year, giving the company a $ 1.7 billion valuation. But dig a little deeper and you’ll find that even a tenth of this market cap could be an overly aggressive valuation.
As a cryptocurrency miner, Riot uses a powerful system of computers to solve complex mathematical equations that validate groups of transactions on bitcoin’s basic ledger (its blockchain). Being the first to resolve a block of transactions, cryptocurrency miners are rewarded with a block reward of 6.25 bitcoin as a Terror. This 6.25 bitcoin is worth more than $ 224,000 as of January 19.
Although a fairly straightforward business model, it is also extremely capital intensive and highly competitive. Riot Blockchain generated only $ 6.7 million in revenue through the first nine months of 2020. The same net loss ($ 16.6 million) was generated through September as it did in the first nine months of 2019. Put another way, there may not even be a Terror hit $ 10 million. in sales 2020, but has a $ 1.7 billion market cap.
Moreover, Riot Blockchain’s business model is minimally driven by product development. Instead, it inherently relies on persistent bitcoin euphoria. History has shown that interest in ebbs and bitcoin flows. With bitcoin interest again at its highest as it makes a second run at $ 40,000, experience suggests that cryptocurrency miners like Riot Blockchain are getting back into the doldrums sooner than later.
Grayscale Bitcoin Trust
Investors would also be wise to avoid buying in Grayscale Bitcoin Trust (OTC: GBTC).
Bitcoin Grayscale Trust is the first bitcoin basket security to be publicly traded. Because the U.S. Securities and Exchange Commission has not given the green light to bitcoin-based mutual funds or exchange-traded funds, the Grayscale Bitcoin Trust has been a popular buy among investors. As of January 19, Grayscale owned 632,761 bitcoin tokens, coldly stored with Coinbase Custody Trust Company. With Grayscale regularly updating its outstanding share account and bitcoin per share, investors can easily calculate its net asset value (NAV).
While buying security on the over-the-counter exchange probably sounds a lot easier than buying and storing bitcoin from a cryptocurrency exchange, there’s one big problem: Grayscale Bitcoin Trust is almost always priced at a premium.
Years ago, it was not uncommon to see Grayscale Bitcoin Trust at a 30% to 120% premium to its NAV. Things aren’t that bad these days, but it was still priced at an 11.7% premium to NAV on January 19. As if it wasn’t enough that investors were overpaying relative to the value of the “asset” basic, the Grayscale Bitcoin A trust charges a high annual fee of 2% for doing who knows exactly.
Suffice it to say that this is not how to invest in bitcoin.
At last – and who could not see this moment of fate coming? – I think buying bitcoin directly on cryptocurrency exchanges is a bad idea.
Last week, I set out the case why bitcoin auxiliary stocks are much smarter and safer ways to play the euphoria around the world’s largest digital token. I also maintained my view that bitcoin is the most risky investment of 2021.
While bitcoin enthusiasts won’t admit it, their digital gold mine is full of potential flaws. For example, the idea of false scarcity fuels it. For now, the code limits bitcoin to 21 million tokens. However, community consensus has the potential to increase this symbolic count. With so many investors “HODL-ing” their bitcoin and refusing to spend it, the only way for bitcoin to gain utility is through a large increase in its circulating supply.
Bitcoin has no game-changing utility. It sees plenty of daily trade volume as day traders and computer trading programs dip in and out of this highly volatile cryptocurrency. But only 2,300 businesses in the US accept bitcoin as a form of payment. That’s out of about 7.7 million businesses with at least one employee.
Bitcoin is not unique. More than 10,000 blockchain companies were founded in China last year alone. In essence, with no barrier to entry in the development of blockchain, there is no guarantee that next-generation technology will even need bitcoin or crypto tokens to transform payment processing or supply chains.
I suggest avoiding direct investments in bitcoin. Instead, buy the complementary businesses that benefit no matter what happens to the world’s largest cryptocurrency.