Despite a tumultuous 2020, one investment stood head and shoulders above all others: bitcoin.
The world’s largest cryptocurrency by market value has more than quadrupled in value in the past 12 months through January 17. It has risen only 9,310% in the last five years. Bitcoin has blown up virtually all other water capital investments, in terms of total return, since the beginning of 2016.
Bitcoin enthusiasts continue to point out their scarcity – a maximum of 21 million tokens will be extracted – and the growing adoption among traders as reasons for their excellent performance.
While there are smart ways to get rich with bitcoin, I believe there are also three terrible ways to invest in this craze.
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Riot Blockchain
There is no shortage of publicly traded cryptocurrency stocks that have led the astronomical rise of bitcoin to large gains of its own. Cryptocurrency mining company Riot Blockchain (NASDAQ: RIOT) it is a perfect example. Riot’s shares rose more than 1,700% last year, giving the company a valuation of $ 1.7 billion. But go a little deeper and you will see that up to a tenth of that market capitalization can be a very aggressive assessment.
As a cryptocurrency miner, Riot uses a high-powered computer system to solve complex mathematical equations that validate groups of transactions in the underlying bitcoin ledger (its blockchain). For being the first to resolve a block of transactions, cryptocurrency miners like Riot receive a reward per block of 6.25 bitcoins. This 6.25 bitcoin was worth more than $ 224,000 on January 19.
Although it is a very simple business model, it is also highly capital intensive and extremely competitive. Riot Blockchain generated only $ 6.7 million in revenue in the first nine months of 2020. It produced the same net loss ($ 16.6 million) until September as it did in the first nine months of 2019. Put another way, Riot can nor reach $ 10 million in sales in 2020, but it carries a market value of $ 1.7 billion.
In addition, Riot Blockchain’s business model is minimally driven by product development. Instead, it is inherently dependent on bitcoin’s sustained euphoria. History shows that interest in bitcoin decreases and flows. With bitcoin’s interest again peaking, once it reaches $ 40,000 for the second time, experience suggests that cryptocurrency miners like the Riot Blockchain are returning to depression sooner or later.
Image source: Getty Images.
Grayscale Bitcoin Trust
Investors should also avoid buying in Grayscale Bitcoin Trust (OTC: GBTC).
Grayscale Bitcoin Trust is the first publicly traded bitcoin basket. Since the United States Securities and Exchange Commission has not given the go-ahead for bitcoin-based mutual funds or exchange-traded funds, the Grayscale Bitcoin Trust has been a popular purchase among investors. On January 19, the gray scale had 632,761 bitcoin tokens, which were cold stored with the Coinbase Custody Trust Company. With Grayscale regularly updating its count of outstanding shares and bitcoin per share, investors can easily calculate their net asset value (NAV).
While buying a bond on the over-the-counter exchange probably seems a lot easier than buying and storing bitcoin in a cryptocurrency exchange, there is one big problem: the grayscale Bitcoin Trust is almost always valued as a prize.
Years ago, it was not uncommon to see the Grayscale Bitcoin Trust with a premium of 30% to 120% over its NAV. Things are not so bad today, but it was still rated 11.7% higher than NAV on January 19. As if it weren’t enough that investors were overpaying for the value of the underlying “asset”, grayscale Bitcoin. Trust charges a staggeringly high 2% annual fee to do who knows what exactly.
Suffice it to say that this is not how you invest in bitcoin.
Image source: Getty Images.
Bitcoin
Finally – and who couldn’t see this turn of fate coming? – I believe that buying bitcoin directly on cryptocurrency exchanges is a bad idea.
Last week, I exposed the case of why auxiliary bitcoin stocks are much smarter and safer ways to play the euphoria around the world’s largest digital token. I also maintained my position that bitcoin is the most dangerous investment of 2021.
Although bitcoin enthusiasts won’t admit it, their digital gold mine is full of potential flaws. For example, it is fueled by the idea of false scarcity. For now, the code limits bitcoin to 21 million tokens. However, community consensus has the potential to increase this token count. With so many investors doing “HODL” on their bitcoin and refusing to spend it, the only way for bitcoin to be of use is through a huge increase in its circulating supply.
Bitcoin is of no use to change the game. He is seeing a high volume of daily trading as day traders and computer trading programs enter and exit the highly volatile cryptocurrency. But only 2,300 companies in the United States accept bitcoin as a form of payment. This is approximately 7.7 million companies with at least one employee.
Bitcoin is not unique. There were more than 10,000 blockchain companies established in China just last year. With virtually no barriers to entry in blockchain development, there is no guarantee that this next generation technology will need bitcoin or crypto-tokens to transform payment processing or supply chains.
I suggest avoiding direct investments in bitcoin. Instead, buy the ancillary businesses that benefit regardless of what happens to the world’s largest cryptocurrency.