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).
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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.
Image source: Getty Images.
10. All bubbles eventually burst
Last, but not least, all next-big-thing investment bubbles eventually burst. No matter how excited investors are about bitcoin and its underlying blockchain, history suggests it won’t be enough to match lofty expectations.
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.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
