The largest by market cap digital cryptocurrency has quadrupled in price over the 12 month period through Jan 17. Bitcoin is up with the amazing 9310% over the last five years. The only asset that blows most of all other equity investments out of the water, in terms of the total return.
Bitcoin fans continue to point to its scarcity, the 21 million coins that will be mined ever, and growing adoption among merchants as reasons for its outstanding performance.
Yes, we have to admit that there are smart ways to get rich from Bitcoin, We believe there are also three awful ways to invest in this craze.
Riot Blockchain (NASDAQ:RIOT) is cryptocurrency mining company, Riot's shares soared over 1800% in the past year. Of course if we dig deeper we will see that even a tenth of this marketcap might be too aggressive a valuation.
Riot Blockchain uses a system of high-powered computers to solve mathematical equations that validate groups of transactions on bitcoin's underlying ledger. The Bitcoin blockchain rewards the first who solve the block of transaction the amount of 6.25 bitcoins. That 6.25BTC are valued at over $225,000 as of Jan 26.
The business model of Riot Blockchain is pretty straightforward, but is also highly capital-intensive and extremely competitive. Riot Blockchain generated only $6.8 million in revenue through the first nine months of 2020. It's produced the same net loss ($16.6 million) through September that it did in the first nine months of 2019. Riot Blockchain have not hit $10 million in 2020 sales, but it carries a $1.7 billion market cap.
Riot Blockchain business is based on the sustained bitcoin euphoria and less on product development. History has shown that interest in bitcoin ebbs and flows. Our experience suggests that with bitcoin peaking at $40.000 miners like Riot Blockchain are headed back into the doldrums sooner than later.
Grayscale Bitcoin Trust
Bulls Investors would also be wise to avoid buying into Grayscale Bitcoin Trust
GrayScale Bitcoin Trust is the first publicly traded bitcoin basket security. Grayscale Bitcoin Trust has been a popular purchase among investors since the U.S. Securities and Exchange Commission hasn't given the green light to bitcoin-based mutual funds or exchanges-traded funds. As of Jan. 20. Grayscale owned 632,761 bitcoin coins, whcih were cold-stored with the Coinbase Custody Trust Company. With Grayscale regularly updating its outsanding share count and bitcoin per share, ivnestors can easily calculate its net asset value (NAV).
Though buying a security OTC (over-the-counter) echange probably sounds a lot easier than buying and storing bitcoin from a regular crypto exchange, there's one big problem: The Grayscale Bitcoin Trust is pretty much always valued at a premium.
Grayscale investors are generally overpaying 11.7% premium to NAV. Sure is not compared to the crazy 30% to 120% premium some years back. Grayscale Bitcoin Trust also charges 2% annual fee for doing absolutely nothing
Why buying bitcoin directly on crypto exchanges is bad idea?
Though bitcoin enthusiasts won't admit it, their digital gold mine is full of potential flaws. For example, it's fueled by the idea of false scarcity. For now, code limits bitcoin to 21 million tokens. However, community consensus has the potential to increase this token count. With so many investors "HODL-ing" their bitcoin and refusing to spend it, the only way for bitcoin to obtain utility is through a big increase in its circulating supply.
Bitcoin lacks game-changing utility. It's seeing plenty of daily trade volume as day traders and computer trading programs dice in and out of the highly volatile cryptocurrency. But only 2,300 businesses in the U.S. accept bitcoin as a form of payment. That's out of approximately 7.7 million businesses with at least one employee.
Bitcoin isn't unique. There were more than 10,000 blockchain companies established in China last year alone. With essentially no barrier to entry in developing blockchain, there are no guarantees that this next-generation technology will even need bitcoin or crypto tokens to transform payment processing or supply chains.