The biggest cryptocurrency by market cap has quadrupled in price over the past 12-months. It’s up an amazing 9,310% over the past five years. Bitcoin destroys pretty much every other investment, in terms of total profits, since the start of 2016.

Bitcoin fans continue to talk about its scarcity — a limit of 21 million tokens will be created — and the increasing adoption as reasons for its jaw-dropping gains.

While there are many possible paths to getting wealthy from bitcoin, I believe there are three terrible mistakes you could make when trying to invest in this asset.

Riot Blockchain

There is no short supply of crypto stocks that continue to ride on bitcoin’s increases to claim their own gains. Crypto miner Riot Blockchain (NASDAQ:RIOT) is a great example. Riot’s price has exploded over 1,700% in the previous year, giving the company a $1.7 billion value. But go deeper and you will find that even 1/10 of this price may be too much.

As a crypto miner, Riot utilizes high-powered computers to complete complex equations that verify transactions on bitcoin’s underlying technology known as blockchain. In exchange for doing this, crypto miners such as Riot are gifted a reward of 6.25 bitcoin per block. This 6.25 bitcoin is now valued at over $224,000.

It might be a straightforward business, but it’s also very capital-intensive and very competitive. Riot Blockchain created only $6.7 million in revenue through the initial 9 months of last year. It’s given the same $16.6 million net loss through Sep. that it did in the initial 9 months of 2019.  To put it another way, Riot might not even reach $10 million in total sales for 2020, but it has a $1.7 billion total cap.

What’s more, Riot Blockchain’s model is only somewhat driven by R&D. Instead, it requires sustained bitcoin enthusiasm. We have learned that interest in bitcoin comes and goes. With interest spiking again as it reaches $40,000, experience shows that miners such as Riot Blockchain are going to hit a downturn sooner rather than later.

Grayscale Bitcoin Trust

Investors should also avoid buying Grayscale Bitcoin Trust (OTC:GBTC).

Grayscale Bitcoin Trust earns the title of the first trade-able bitcoin basket security. Since the SEC has not green-lit bitcoin mutual funds, Grayscale has been a very popular buy among investors. As of January 19, Grayscale claimed a total of 632,761 bitcoins, which were kept in “cold storage” within the Coinbase Custody Trust Company. With Grayscale routinely updating its bitcoin per share and share count, you can easily add up its net asset value (NAV). 

Though buying a security through an over-the-counter exchange seems a lot easier than purchasing bitcoin from a crypto exchange, there’s just one problem: The Grayscale Bitcoin Trust is always sold at a premium.

Previously, it wasn’t unheard of to see it priced at a 30% to 120% premium to its NAV. Things have gotten better, but it was still priced at an 11.7% premium to NAV on January 19. Investors are already grossly overpaying relative to the value of the underlying “asset,” but the Grayscale Bitcoin Trust wants a jaw-droppingly high 2% fee. So no, this is not how you should invest in bitcoin.

Bitcoin

Lastly — you may have seen this coming — I think purchasing bitcoin directly on exchanges is a terrible idea.

Just last week, I made the case for why related bitcoin stocks are a much safer and smarter way to profit from the excitement that surrounds Bitcoin. I also issued my opinion that bitcoin is among the most dangerous investments of this year.

Though bitcoin fans won’t say it, their “digital gold” is chock full of possible flaws. For one, it’s founded by the idea of false scarcity. For now, bitcoin is limited to 21 million tokens. But, with community consensus, that could increase. With so many people buying and holding “HODL-ing” their coins and refusing to circulate them, the only way for the asset to obtain utility is by increasing its supply.

Bitcoin does not have game-changing utility. It’s having lots of trade volume as traders and computer programs get in and get out. But just 2,300 businesses accept bitcoin as a form of payment. That’s out of around 7.7 million total businesses with at least one employee.

Bitcoin is not unique. There were over 10,000 blockchain companies created in China in 2020. With no barrier to entry in creating a blockchain, there are no certainties that this technology will need bitcoin or other cryptos to revolutionize payment processing. 

I recommend avoiding bitcoin. Instead, buy the related companies that benefit regardless of what happens to the biggest and most-hyped cryptocurrency.

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