Why investors should be careful with bitcoin

There’s absolutely no substance behind this rally.

Last year certainly qualifies as one of the most volatile in stock market history. Investors navigated their way through the widely followed S&P 500 losing over a third of its value in about a month. They also enjoyed a bounce-back rally for the ages, with the S&P 500 hitting new highs less than five months after finding a bottom on March 23.

If there’s one figure that stands out above all else, it’s that 10% of the roughly 3,700 stocks with a market cap of at least $300 million ended 2020 higher by at least 100%. That’s a head-scratching number considering the magnitude of the recession caused by the coronavirus disease 2019 (COVID-19) pandemic.

There’s no question that select equities and assets got ahead of themselves over the trailing nine months since the stock market bottomed. However, one investment looks to be the most dangerous of all. That investment, which I strongly believe should be avoided at all costs in 2021, is cryptocurrency bitcoin.

This investment is nothing but trouble

The largest digital token in the world by market cap hit an early morning high on Jan. 3 of $34,000. For some context, bitcoin has doubled since Nov. 27, is up 200% since mid-October, and has risen 363% over the trailing-12-month period. Bitcoin’s implied market cap of $628.2 billion now accounts for nearly 73% of the $866.3 billion in value tied up in more than 8,100 digital tokens.

Why is bitcoin rallying? Search any number of social media platforms and you’ll get no shortage of responses from enthusiasts. Bitcoin bulls often suggest that its competitive edge, community consensus, and game-changing potential to transform payment processing made this rally easy to predict.

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As for me, I don’t believe bitcoin is unique in any way, save for being one of the preferred investment mediums on cryptocurrency exchanges. In other words, if investors want to buy a less-popular token, they’ll usually need to exchange their fiat currency to bitcoin first before making their purchase. That, my friends, is the only true utility that bitcoin serves.

Below is a growing list of reasons I believe bitcoin is the most dangerous investment of 2021.

The concept of scarcity has been pulled out of thin air

Bitcoin bulls often point to its so-called hard cap of 21 million tokens as proof of its scarcity. Simple economics tells us that if demand for a good exceeds supply, and supply is limited, the price of that good should rise. Case closed, right?

You see, we’re not talking about a physical good being in limited supply. Bitcoin’s token cap is nothing more than an arbitrary figure plucked from thin air. Physical gold is considered scarce because we can’t make any more gold than what can be found and mined on planet Earth. That’s not the case with bitcoin. Community consensus could lead to an increase in the token limit. The chance of this happening might be small, but it’s not 0%.

Bitcoin offers the perception of scarcity, and this falsity has helped drive its valuation higher.

There’s minimal utility

You’ll also hear about bitcoin being the future of global payments. Again, this isn’t entirely accurate or possible.

While the number of businesses accepting bitcoin as payment is climbing, the actual percentage of businesses willing to accept bitcoin is tiny. According to financial services company Fundera, only around 2,300 U.S. businesses accept bitcoin as payment. Yet, the U.S. Census Bureau finds there are 32.5 million businesses in the U.S., including sole proprietorships. Even if we just counted businesses that have an employee, that’s 2,300 out of 7.7 million companies accepting bitcoin.

Plus, approximately 40% of bitcoin tokens are held by investors and kept out of circulation. That leaves about 11.2 million bitcoin for transactions. The value of these tokens is close to $380 billion. In 2019, global gross domestic product totaled $142 trillion.

Bitcoin has no path to game-changing utility.

It’s not a store of value

No matter how much bitcoin enthusiasts want to equate bitcoin to gold, it’s never going to be a store of value.

Store of value assets usually have identifiable relationships to government-backed fiat currencies, and they aren’t all that volatile. For instance, gold has an identifiable inverse relationship with the U.S. dollar, and it’s buoyed by physical scarcity.

Bitcoin doesn’t have any identifiable relationships to government-backed fiat currencies. Enthusiasts would like you to believe that an inflated U.S. money supply is good news for bitcoin, but that would only be true if it had some sort of like-for-like federal government backing and had true scarcity – neither of which is true.

Bitcoin has also lost 80% of its value multiple times over the past decade, including a handful of instances when it was halved in roughly a 24-hour period. That’s not how store-of-value assets behave.

You have no ownership in the underlying blockchain

Bitcoin bulls are also quick to point out how bitcoin’s blockchain is revolutionizing the payment and settlement process. While it’s true that blockchain offers plenty of intrigue, buying bitcoin doesn’t give token holders any ownership in the underlying architecture that might actually be worth something.

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What’s more, it’s foolish (small f) to assume that bitcoin’s blockchain is superior. Bitcoin may have first-mover advantage, but there are hundreds of ongoing blockchain projects that offer possibilities beyond the financial space.

There’s virtually no barrier to entry

It’s also important to note that the cryptocurrency space has virtually no barrier to entry. All it takes is some time and money to develop blockchain with or without a tethered digital currency. There are exactly zero guarantees that blockchain will be adopted on a broad scale, or that bitcoin will be in any way necessary.

There are a number of blockchain projects in development that may work with fiat currencies, or without a digital token at all.

It’s not just bitcoin that’s dangerous

Keep in mind that owning bitcoin isn’t the only way you can gain exposure to this dangerous investment. The Grayscale Bitcoin Trust (OTC: GBTC) owns 607,038 bitcoin and essentially acts as a basket fund that investors can buy. Of course, those investors will pay a ridiculous 2% fee annually for the right to buy the Grayscale Bitcoin Trust, and may have to buy in at a premium, as in years past. 

Likewise, business intelligence company MicroStrategy (NASDAQ: MSTR) sunk more than $1.1 billion in balance sheet cash into bitcoin. This cryptocurrency stock issued debt just to buy extra bitcoin. Meanwhile, MicroStrategy’s sales through the first months of 2020 were down 1%, while its operating losses widened.

Put plainly, bitcoin is dangerous. It’s driven by short-term emotions, technical analysis, and misinformation about its scarcity, utility, and long-term potential. It’s the one investment you should strongly avoid in 2021.

Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool recommends MicroStrategy and has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.

The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.

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Last year certainly qualifies as one of the most volatile in stock market history. Investors navigated their way through the widely followed S&P 500 losing over a third of its value in about a month. They also enjoyed a bounce-back rally for the ages, with the S&P 500 hitting new highs less than five months after finding a bottom on March 23.

If there’s one figure that stands out above all else, it’s that 10% of the roughly 3,700 stocks with a market cap of at least $300 million ended 2020 higher by at least 100%. That’s a head-scratching number considering the magnitude of the recession caused by the coronavirus disease 2019 (COVID-19) pandemic.

There’s no question that select equities and assets got ahead of themselves over the trailing nine months since the stock market bottomed. However, one investment looks to be the most dangerous of all. That investment, which I strongly believe should be avoided at all costs in 2021, is cryptocurrency bitcoin.

This investment is nothing but trouble

The largest digital token in the world by market cap hit an early morning high on Jan. 3 of $34,000. For some context, bitcoin has doubled since Nov. 27, is up 200% since mid-October, and has risen 363% over the trailing-12-month period. Bitcoin’s implied market cap of $628.2 billion now accounts for nearly 73% of the $866.3 billion in value tied up in more than 8,100 digital tokens.

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