It’s been a challenging year for Wall Street. We’ve witnessed the quickest bear market decline of at least 30% in history, as well as the most ferocious comeback of all time, with the benchmark S&P 500 taking less than five months to reach new highs.
But one investment that hasn’t been phased by the coronavirus pandemic or heightened volatility is the cryptocurrency bitcoin. On a year-to-date basis, through Wednesday evening, Oct. 14, bitcoin was up just shy of 60%.
Image source: Getty Images.
Why is bitcoin outperforming in 2020?
Why does bitcoin continue to outperform equities? For one, there’s the idea of scarcity. Only 21 million bitcoin tokens can be mined, which creates a level of scarcity that pushes up the value of these digital tokens.
Another reason bitcoin has done so well is the expectation of a digital revolution. This is to say that bitcoin buyers believe the utility of paper money has come and gone. This could prove somewhat accurate with the pandemic highlighting the potential for physical cash to be a carrier of harmful germs. With the rise of peer-to-peer payment platforms, bitcoin looks to become the superior digital currency.
Bitcoin also benefits from its first-mover advantage in the cryptocurrency space. It was the first digital token to catch on with investors, and happens to be the largest on a market-cap basis by a significant amount (it’s five times the size of Ethereum, the second-largest cryptocurrency by market cap). Today, bitcoin serves as the intermediary asset on a number of crypto investment platforms if you want to purchase a less-common token (i.e., anything not named Ethereum or Ripple).
Image source: Getty Images.
Buying bitcoin could be a big mistake
But as good as bitcoin has been for investors in 2020, my blunt opinion is that it’s a terrible investment. Here are 10 reasons you should avoid bitcoin like the plague.
1. Bitcoin isn’t really scarce
First of all, bitcoin is only as scarce as its programming dictates. Whereas physical metals, such as gold, are limited to what can be mined from the earth, bitcoin’s token count is limited by computer programming. It’s not out of the question that programmers, with overwhelming community support, could choose to increase bitcoin’s token limit at some point in the future. Thus, bitcoin offers the perception of scarcity without actually being scarce.
2. It has a utility problem
The king of cryptocurrencies also has a utility problem. To date, only 18.51 million bitcoin tokens are in circulation, with an estimated 40% of these held by small group of investors. Even considering the fact that fractional token ownership exists, roughly 10 million to 11 million tokens in circulation aren’t going to go very far. For context, global gross domestic product was $81 trillion in 2017. Meanwhile, bitcoin has approximately $114 billion to $125 billion in tokens freely circulating and not held tight by investors. There’s minimal utility here.
3. There’s a low barrier to entry
Bitcoin may enjoy first-mover advantage at the moment, but the barrier to entry in the cryptocurrency space is especially low. All it takes is time and coding knowledge for blockchain — the digital and decentralized ledger that records transactions — to be developed and a digital token to be tethered to the network. There’s nothing unique about bitcoin’s underlying blockchain that other businesses couldn’t one-up.
Image source: Getty Images.
4. Few (if any) tangible means to value bitcoin
Another beef with bitcoin is that there’s no tangible way to value it as an asset. For instance, if you want to buy shares of a publicly traded company, you can scour income statements, its balance sheet, read about industrywide catalysts, and listen to management commentary from recent conference calls and presentations. In other words, you can make an informed decision.
With bitcoin, there is no tangible data for investors to wrap their hands around. There’s transaction settlement times and total circulating token supply, but neither of these figures tells us anything about the value or utility of bitcoin.
5. Fiat currencies may work on blockchain
I believe investors are also placing their faith in the wrong asset. Over the long term, blockchain technology is where the real value lies. Blockchain can be used to reinvent supply-chain management and expedite overseas payments. But when folks are buying into bitcoin, they’re gaining ownership in digital tokens with zero ownership of the underlying blockchain.
To build on this point, companies are also testing blockchain that’s tethered to fiat currencies. For example, Mastercard(NYSE:MA)was awarded a patent in July 2018 “for linkage of blockchain-based assets to fiat currency amounts.” This implies there may not be any need for a made-up digital token to be used at all on blockchain networks.
6. Blockchain is years from being mainstream
A sixth issue is that blockchain is still years away from gaining real relevance. Three years ago, when blockchain companies and cryptocurrency stocks were the hottest thing since sliced bread, it was expected that blockchain technology would be quickly adopted. Little did investors foresee the Catch-22 that would arise. Specifically, no businesses are willing to make the costly and time-consuming switch to blockchain without the technology being broadly tested — yet companies aren’t willing to make this initial leap to test the technology and prove its scalability.
In short, blockchain is years away from being a mainstream technology.
Image source: Getty Images.
7. Fraud/theft is a serious issue
By no means are cryptocurrencies the only asset to be hacked by thieves, but there are serious fraud and theft concerns that accompany bitcoin. For instance, novice bitcoin investors may not understand the need to store their tokens in a digital wallet, thereby leaving them susceptible to theft by hackers.
Additionally, it’s been hypothesized by numerous blogs and publications that North Korea has turned to bitcoin mining and theft to funnel money into its isolated economy. Bitcoin is commonly viewed as the “currency” of choice for criminal organizations.
8. There’s no regulation
Bitcoin is also an unregulated asset. Though this lack of regulation is actually a selling point for today’s crypto investors given that it provides some degree of anonymity, it’s bad news if something ever goes wrong. Since the majority of cryptocurrency trading and transactions occur outside the borders of the United States, the Securities and Exchange Commission is very limited in what it can do if your digital tokens are ever stolen.
9. The tax situation is a nightmare
If you think preparing your federal income taxes stinks now, try preparing them after investing in and/or using bitcoin in any transaction. The Internal Revenue Service expects you to report capital gains and losses tied to investment activity, as well as gains and losses associated with purchasing goods and services.
For example, if you bought a single bitcoin token at $11,000, then used a fraction of your bitcoin to buy a new smartphone for $1,000, you’d have to calculate the value of your bitcoin used at the time of the transaction and recognize capital gains or losses relative to your cost basis. It’s a gigantic headache.
Mind you, we’ve already witnessed multiple 80%-plus declines in bitcoin throughout its history. Extreme volatility is a given with digital currencies like bitcoin, and history would suggest that significant downside from its current price is a near certainty as well.
BC Liberal candidate Jackie Tegart has announced that $2 million from the Liberals’ Rebuild B.C. plan has been earmarked for the development of the McAbee Fossil Beds as a tourist destination.
The McAbee Beds are located east of Cache Creek on the Trans-Canada Highway, and are internationally recognized as the most diverse site known in British Columbia for plants and insects of the Eocene Epoch from 50 million years ago.
In 2012 the beds were declared a heritage site by the provincial government and closed to the public. In 2017 a working group of volunteers secured funding to develop a business plan for the site, which set out a phased approach to develop a world-class interpretive and research centre at the globally significant site, which could attract up to 50,000 visitors each year.
The McAbee Beds were recognized with a “Stop of Interest” sign and reopened to the public in the summer of 2019. The COVID-19 pandemic halted plans to open the site again in 2020, but work on a trail system for visitors began in September, with the hope of welcoming visitors again in 2021.
The BC Liberals recently announced their $8 billion Rebuild B.C. plan, which includes increased funding to accelerate infrastructure projects to meet the needs of the province’s growing population, create jobs, and improve long-term productivity. The McAbee site has been recognized for the enormous potential it has as a centre for education, research, and tourism, and the Liberals say that investment in it would put people to work immediately as the site is developed, and for years to come as the centre becomes operational.
“This site is of interest to researchers, students, and visitors,” says Tegart. “Investing in developing McAbee as a tourist destination will create jobs and allow more British Columbians to safely visit and spend time in our community.”
Over the next year, 20 new schools will be built across Ontario and eight existing schools will see state-of-the-art permanent additions.
That’s according to the provincial government, who are investing $550-million in the project, which is expected to add nearly 16,000 new learning spaces and 870 new licensed child care spaces over the 2020-2021 school year.
“Our government is doing everything possible to ensure our students can achieve lifelong success,” said Premier Doug Ford. “That’s why we made a significant commitment to fix our schools and ensure students and staff have access to the best classrooms, with features like modern ventilation systems and high-speed Internet access. During construction, these projects will create hundreds of jobs and contribute significantly to our economic recovery.”
Some schools will also be getting upgrades to enhance their facilities and add more student spaces.
“This government firmly believes that all children deserve to learn in state-of-the-art, modern, technologically connected and accessible schools,” said Education Minister Stephen Lecce. “We will continue to take action to ensure students are safe today and well into the future by approving more new school buildings and permanent additions, and increasing access to child care for working parents.”
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Israel, the United Arab Emirates (UAE) and US announced on Tuesday the establishment of a development fund during the first-ever visit of an Emirati delegation to Tel Aviv.
The Abraham Fund, derived from the Abraham Accords, the official name of the normalization deal between Israel and the UAE, will be launched with an initial investment of $3 billion, said US International Development Finance Corporation CEO Adam Boehler.
He said the Jerusalem-based fund aims to promote economic cooperation and prosperity in the Middle East and North Africa.
In a statement, the US Embassy in Israel said the fund is “a manifestation of the new spirit of friendship and cooperation between the three countries, as well as their common will to advance the region”.
On Sept. 15, the UAE and Bahrain agreed to establish full diplomatic, cultural and commercial relations with Israel after signing controversial agreements at the White House.
The deals have drawn widespread condemnation from Palestinians, who say the accords ignore their rights and do not serve the Palestinian cause.
* Ahmed Asmar contributed to this report from Ankara
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