2020 was absolutely one of the most volatile in history. Investors pushed their way through the S&P 500 dropping over a third of its value in only 30 days. But they also had a rally for the history books, with the market hitting new records only five months after hitting the bottom in March.
But there’s no denying that certain investments got ahead of themselves over the next nine months since this March bottom. However, one investment is more dangerous than the rest. And I believe it should be avoided in 2021. That investment is bitcoin.
It is nothing but a problem
The largest digital cryptocurrency in the world has hit a high of $34,000. For context, bitcoin is up 200% since November. And since October, it is up 363%.
Why is bitcoin exploding? Search the internet and you’ll get plenty of explanations. Bitcoin fans often say that its potential to transform the payment industry made this rally inevitable.
But for me, I don’t see bitcoin as unique at all. In fact, below is my growing list of reasons why bitcoin is the most dangerous thing you could invest in.
Its scarcity is a lie
Bitcoin fans will say it has a hard limit of 21 million coins and that is proof of its scarcity. And economics says if demand exceeds supply, the price will increase.
Well, not always. We’re not referring to a physical thing in limited supply. Bitcoin’s cap is just an arbitrary number created out of thin air. Gold is considered scarce because we can’t make more of it. Bitcoin is not the same because “community consensus” could increase the token limit. The chance of this happening is small, but it’s still there.
Because of this, Bitcoin gives its users the belief of scarcity, and this makes the price increase as a result.
It’s not as usable as you think
People say bitcoin will be the future of trans-national payments. But again this is flawed.
Sure, the number of companies accepting bitcoin is increasing, but the actual percentage willing to accept it is very very small. According to Fundera, only about 2,300 U.S. companies accept bitcoin. But the Census Bureau lists 32.5 million businesses in the U.S.
And more than that, about 40% of tokens are kept by investors and not circulated. That gives us 11.2 million coins for transactions. These tokens are worth around $380 billion. But 2019’s global GDP came to a total of $142 trillion. Bitcoin has no “game-changing utility.”
Store of value? You have to be kidding!
Bitcoin bulls always compared bitcoin to gold. But it will never be a store of value.
Assets which are a store of value usually have a connection to gov-backed currencies, and they tend to be stable. For instance, gold has an inverse connection to the U.S. dollar, and it’s buoyed by real scarcity.
Bitcoin doesn’t have this. Enthusiasts claim an inflated dollar is good news for bitcoin, but that would only be the case if it had government backing and real scarcity — but it has neither.
Bitcoin has also lost 80% of its value on multiple occasions over the past 10 years, including more than once losing half of its value in 24-hours. That’s not a store-of-value asset.
You don’t own the underlying technology
Bitcoin fans also point its blockchain technology as revolutionizing payments and settlements. While it’s true that blockchain technology is innovative, buying bitcoin doesn’t give you ownership of that technology.
But even more so, bitcoin’s blockchain is not the only one out there. It has first-mover advantage, but blockchain projects now number into the hundreds if not more.
No barrier to entry
Another important point is that cryptocurrency has no barrier to entry. Anyone can develop blockchain with or without a linked digital currency. There are NO guarantees that blockchain will be used on a broad scale, or that bitcoin will even be needed for using that technology.
Plus, there are many blockchain projects being developed that may work with fiat currencies, or without any tokens whatsoever.
It’s more than bitcoin
Buying bitcoin is not the only danger here. Another way you could get yourself into danger is investing in the Grayscale Bitcoin Trust (OTC:GBTC). This group owns 607,038 bitcoin and operates like a fund that investors can buy. And of course, they will charge you an obscene 2% fee to buy their cutting-edge fund.
And further, business intel company MicroStrategy (NASDAQ:MSTR) has put more than $1.1 billion into bitcoin. This stock issued debt just to buy more bitcoin. And MicroStrategy’s sales through Q1 of 2020 were down 1%, while its operating losses exploded.
Put bluntly, bitcoin is super dangerous. It’s driven by short-term trends and emotions and misinformation about its utility, scarcity, and long-term potential. It’s my #1 investment to avoid in 2021.