The 3 Worst Ways to Invest in Bitcoin

Despite a tumultuous 2020, one investment dominated all others: bitcoin.

The world’s largest cryptocurrency by market cap has more than quadrupled in value over the past 12 months through January 17. It has increased by 9,310% over the past five years. Bitcoin has taken just about every other equity investment out of the water, in terms of total return, since the start of 2016.

Bitcoin enthusiasts continue to highlight its rarity – a maximum of 21 million tokens will be mined – and its growing adoption by traders as the reasons for its outstanding performance.

While there are smart ways to get rich with bitcoin, I think there are also three terrible ways to invest in this craze.

Riot blockchain

There is no shortage of publicly traded cryptocurrency stocks that have propelled bitcoin’s astronomical rise to big gains. Cryptocurrency mining company Riot blockchain (NASDAQ: RIOT) is a perfect example. Riot shares have climbed more than 1,700% in the past year, putting the company at a valuation of $ 1.7 billion. But dig a little deeper and you’ll find that even a tenth of that market cap could be too aggressive a valuation.

As a cryptocurrency miner, Riot uses a high-powered system of computers to solve complex mathematical equations that validate groups of transactions on Bitcoin’s underlying ledger (its blockchain). For being the first to resolve a block of transactions, cryptocurrency miners like Riot receive a reward of 6.25 bitcoins. This 6.25 bitcoin is worth over $ 224,000 as of January 19.

While this is a fairly straightforward business model, it is also very 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) through September as in the first nine month of 2019. In other words, Riot might not even hit $ 10 million. in 2020 sales, but it has a market cap of $ 1.7 billion.

Additionally, Riot Blockchain’s business model is hardly driven by product development. On the contrary, it intrinsically depends on the sustained euphoria of bitcoin. History has shown that interest in bitcoin flows and flows. With interest in bitcoin peaking again as it makes a second run to $ 40,000, experience suggests cryptocurrency miners like Riot Blockchain are slipping back into the doldrums sooner rather than later.

Bitcoin trust in grayscale

Investors would also be advised to avoid buying Bitcoin Trust in Grayscale (OTC: GBTC).

Grayscale Bitcoin Trust is the first publicly traded Bitcoin basket security. Since the United States 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 buy among investors. As of January 19, Grayscale owned 632,761 bitcoin tokens, which were cold stored with the Coinbase Custody Trust Company. With Grayscale regularly updating its outstanding stock count and bitcoin per share, investors can easily calculate its net asset value (NAV).

While buying a security on the OTC exchange probably seems a lot easier than buying and storing bitcoin from a cryptocurrency exchange, there is one big problem: Grayscale Bitcoin Trust is pretty much always priced at a premium.

Years ago, it was not uncommon to see the Grayscale Bitcoin Trust with a premium of 30% to 120% over its net asset value. Things aren’t that bad these days, but he was still valued at an 11.7% premium over NAV on January 19. Trust charges a staggering 2% annual fee for doing who knows what exactly.

Suffice it to say, this is not the way to invest in bitcoin.

Bitcoin

Finally – and who couldn’t see this twist of fate coming? – I think buying bitcoin directly on cryptocurrency exchanges is a bad idea.

Last week I explained why ancillary bitcoin stocks are a much smarter, safer way to play the euphoria surrounding the world’s largest digital token. I have 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 number of tokens. With so many investors “HODL-ing” their bitcoin and refusing to spend it, the only way for bitcoin to gain utility is to dramatically increase its circulating supply.

Bitcoin does not have a revolutionary utility. He sees a lot of daily trading volume as day traders and computer trading programs move in and out of highly volatile cryptocurrency. But only 2,300 companies in the United States accept bitcoin as a method of payment. That’s over about 7.7 million businesses with at least one employee.

Bitcoin is not unique. There were more than 10,000 established blockchain companies in China last year alone. With 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 processing or supply chains.

I suggest avoiding direct investments in Bitcoin. Instead, buy the ancillary businesses that benefit from it no matter what happens to the world’s largest cryptocurrency.