It has been a difficult year for Wall Street. We have witnessed the fastest bear market decline of at least 30% in history, as well as the fiercest comeback of all time, when it took less than five months for the S&P 500 to reach new highs.
But one of the investments that has not been implemented in stages due to the coronavirus pandemic or increased volatility is the bitcoin cryptocurrency. On an annual basis, as of Wednesday evening, October 14, bitcoin was even slightly below 60%.
Bitcoin made of physical gold stood in front of a digital chart on which price and volume indicators were visible.
Why is Bitcoin showing the best results in 2020?
Why does Bitcoin continue to outperform Stocks? First, there is the idea of scarcity. Only 21 million Bitcoin tokens can be mined, which creates a level of scarcity that determines the value of these digital tokens.
Another reason bitcoin is doing well is the expectation of a digital revolution. This means that bitcoin buyers believe that the usefulness of fiat money has come and gone. This may be somewhat accurate, as the pandemic highlights the possibility that material criticism may be a carrier of harmful microbes. With the advent of peer-to-peer payment platforms, bitcoin aims to become a superior digital currency.
Bitcoin also benefits from the trailblazer advantage in the cryptocurrency space. It was the first digital token that was snapped up by investors, and it turned out to be the largest by market capitalization by a significant amount (which is five times the size of Ethereum, the second largest cryptocurrency by market capitalization). Today, bitcoin acts as an intermediate asset on a number of crypto investment platforms if you want to buy a less common token (that is, anything that is not called Ethereum or Ripple).
Buying Bitcoin Can be a Big Mistake
But despite the quality of bitcoin for investors in 2020, my frank opinion is that it is a terrible investment. Here are 10 reasons why you should avoid Bitcoin like the plague.
1. Bitcoin is Actually Not Uncommon
First of all, Bitcoin is as rare as programming requires. While physical metals such as gold are limited by what can be extracted from the Ground, the number of bitcoin tokens is limited by computer programming. It is possible that programmers, with the overwhelming support of the community, will decide to increase the Bitcoin token limit at some point in the future. Thus, bitcoin creates a sense of scarcity, not really being a rarity.
2. She has problems with utilities
The king of cryptocurrencies also has a utility problem. To date, there are only 18.51 million bitcoin tokens in circulation, and it is estimated that 40% of them belong to a small group of investors. Even taking into account the fact that there is partial ownership of tokens, approximately 10 to 11 million tokens in circulation will not go far. For context, global GDP in 2017 reached $81 trillion. At the same time, bitcoin has approximately 114 billion to 125 billion tokens in freely traded tokens and is not held by investors. There is a minimal benefit here.
3. There is a low barrier to entry
Bitcoin may have the trailblazer advantage at the moment, but the barrier to entry into the cryptocurrency space is particularly low. All that is required is time and coding knowledge to develop a blockchain - a digital and decentralized ledger of transactions - and connect a digital token to the network. There is nothing unique in the Bitcoin core blockchain that other companies could not come up with.
4. Several (if any) specific ways to evaluate Bitcoin
Another problem with bitcoin is that there is no tangible way to value it as an asset. For example, if you want to buy shares of a public joint stock company, you can view profit and loss statements, its balance sheet, read about industry-wide catalysts, listen to management reviews of telephone conferences and recent presentations. In other words, you can make an informed decision.
As for bitcoin, investors do not have specific data to rely on. There is a transaction settlement time and a total token supply, but none of these figures tells us anything about the value or usefulness of bitcoin.
5. Fiat currencies can work on the blockchain
I think investors trust the wrong assets. In the long run, the real value lies in blockchain technology. Blockchain can be used to rethink supply chain management and accelerate offshore payments. But when people buy bitcoin, they acquire ownership of digital tokens with zero ownership of the underlying block.
To develop this point, companies are also testing fiat-linked blockchains. For example, MasterCard (0.65%) received a patent in July 2018 "for linking blockchain-based assets to fiat currency amounts.""This means that there may be no need to use a fictitious digital code in blockchains at all.
6. Blockchain is still many years away from becoming mainstream
The sixth problem is that the blockchain is still many years away from gaining real relevance. Three years ago, when blockchain companies and cryptocurrency stocks were the most important thing after slices of bread, it was expected that blockchain technology would be implemented quickly. Investors expected little from the "Catch-22" that could arise. In particular, there are no companies ready to make an expensive and time-consuming transition to blockchain without large-scale testing of the technology - and yet companies are not ready to make this initial leap to test the technology and prove its scalability.
In short, blockchain is still many years away from becoming a mainstream technology.
7. Fraud/theft is a serious problem
Cryptocurrencies are by no means the only asset that is hacked by thieves, but serious fears of fraud and theft accompany bitcoin. For example, novice bitcoin investors may not understand the need to store their tokens in a digital wallet, which makes them vulnerable to theft by hackers.
In addition, many blogs and publications suggested that North Korea turned to bitcoin mining and theft to transfer money to its isolated economy. Bitcoin is generally perceived as the preferred "currency" for criminal organizations.
8. There is no regulation
Bitcoin is also an unregulated asset. While this lack of regulation is actually an advantage for crypto investors today, as it provides a certain degree of anonymity, it's bad news if something goes wrong. Since most cryptocurrency trading and transactions take place outside the United States, the Securities and Exchange Commission is very limited in what it can do if your digital tokens are stolen.
9. The tax situation is a nightmare
If you think your federal income tax preparation stinks right now, try preparing it after investing in bitcoin and/or using it for any transaction. The Tax Service expects you to report capital gains and losses related to investment activities, as well as gains and losses related to the purchase of goods and services.
For example, if you bought one bitcoin token for $11,000 and then used a small portion of bitcoin to buy a new smartphone for $1,000, you will have to calculate the value of the bitcoin used at the time of the transaction and recognize capital gains or losses relative to the cost basis. This is a huge headache.
10. All bubbles burst at the end
Last but not least, all of the following major investment bubbles have finally burst. No matter how excited investors are about bitcoin and the underlying blockchain, history shows that it will not be enough to meet high expectations.
Keep in mind that we have already seen a multiple decline of bitcoin by 80% in its entire history. Digital currencies such as bitcoin are characterized by extreme volatility, and history suggests that a significant decline in its current price is also almost certain.
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