Despite the turbulent 2020, one investment stood above all others: bitcoin.
The world’s largest cryptocurrency by market capitalization has more than quadrupled over the 12-month period to January 17. This is 9.310% lower for the last five years. Bitcoin has blown almost all other capital investment in terms of total return since early 2016.
Bitcoin enthusiasts continue to point to its shortage – a maximum of 21 million tokens will be withdrawn – and the growing acceptance among traders as reasons for its outstanding results.
While there are smart ways to get rich from bitcoin, I believe there are three terrible ways to invest in this craze.
There is no shortage of publicly traded cryptocurrency stocks, which have brought the astronomical growth of bitcoin to large own profits. Cryptocurrency mining company Riot Blockchain 09.30 NASDAQ: RIOT is a perfect example. Shares of Riot have jumped more than 1,700 percent in the past year, valuing the company at $ 1.7 billion. But dig a little deeper and you will see that even a tenth of this market capitalization can be too aggressive an estimate.
As a cryptocurrency miner, Riot uses a system of powerful computers to solve complex mathematical equations that validate groups of transactions in Bitcoin’s general ledger (its blockchain). To be the first to decide a block of transactions, cryptocurrency miners like Riot receive a block reward of 6.25 bitcoins. This 6.25 bitcoin costs over $ 224,000 as of January 19th.
Although this is a fairly clear business model, it is also extremely capital intensive and extremely competitive. Riot Blockchain generated only $ 6.7 million in revenue in the first nine months of 2020. In September, it generated the same net loss ($ 16.6 million) that it made in the first nine months of 2019. In other words, Riot it may not even reach $ 10 million in sales in 2020, but it has a market capitalization of $ 1.7 billion.
In addition, Riot Blockchain’s business model is only minimally driven by product development. Rather, it relies on sustained bitcoin euphoria. History shows that interest in the ebb and flow of bitcoin. As interest in bitcoin peaked again, making a second run of $ 40,000, experience has shown that cryptocurrency miners like Riot Blockchain return to the depression sooner rather than later.
Trust of bitcoins in the gray rock
Investors would also be wise to avoid buying Trust of bitcoins in the gray rock (OTC: GBTC).
Trust Grayscale Bitcoin Trust is the first publicly traded bitcoin security basket. 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 is a popular purchase among investors. As of January 19, Grayscale owned 632,761 bitcoin tokens, which were stored cold at the Coinbase Custody Trust Company. With Grayscale, which regularly updates its exclusive number of shares and bitcoin per share, investors can easily calculate its net asset value (NAV).
Although buying a security on the stock market without a prescription probably sounds much easier than buying and storing bitcoin from a cryptocurrency exchange, there is one big problem: Trust Grayscale Bitcoin Trust is almost always valued at a premium.
Years ago, it was not uncommon to see a Grayscale Bitcoin Trust with a 30% to 120% markup for its NAV. Things aren’t so bad these days, but it was still estimated at an 11.7% surcharge for NAV on January 19th. As if it’s not enough for investors to overpay for the value of the underlying “asset”, Bitcoin in the Gray Scale Trust charges a staggeringly high annual fee of 2% to do exactly what.
Suffice it to say that this is not the way to invest in bitcoin.
And finally – and who could not see this turn of fate coming? – I believe that buying bitcoin directly on cryptocurrency exchanges is a bad idea.
Last week, I set out why auxiliary bitcoin stocks are much smarter and safer ways to replicate the euphoria surrounding the world’s largest digital token. I also maintained that bitcoin is the most dangerous investment in 2021.
Although bitcoin enthusiasts will not admit it, their digital gold mine is full of potential drawbacks. For example, this is fueled by the idea of a false shortage. So far, the code limits bitcoin to 21 million tokens. However, community consensus has the potential to increase the number of these symbols. With so many HODL-ing investors refusing to spend their bitcoins, the only way for bitcoin to benefit is through a large increase in the circulation it offers.
Bitcoin has no utility for changing the game. He sees a lot of daily trading volume as daily traders and computer trading programs gamble and exit the highly volatile cryptocurrency. But only 2,300 companies in the United States accept bitcoin as a method of payment. This is from approximately 7.7 million companies with at least one employee.
Bitcoin is not unique. Last year alone, there were more than 10,000 blockchain companies in China. As there is essentially no barrier to entry into blockchain development, there is no guarantee that this next-generation technology will even need bitcoin or crypto tokens to transform payment or supply chains.
I suggest avoiding direct investment in bitcoin. Instead, buy subsidiaries that benefit, no matter what happens to the world’s largest cryptocurrency.