In less than a week, investors can blow out their champagne tampons and celebrate another successful year. Through December 22, widely followed Standard & Poor’s 500 It was 25% higher, more than double the average annual total return of about 11%, including dividends, since the beginning of 1980.
But it was the cryptocurrency space that offered the most attractive gains of all. Since the beginning of the year, the total value of all digital currencies is close to trebling. unsurprisingly, Bitcoin (CRYPTO: BTC) It was one of the largest contributors to this increase in face value, with an annual gain of 67%. It represents 40.5% of the total $2.27 trillion cryptocurrency market.
Bitcoin more than doubled S&P 500 gains in 2021
Bitcoin’s gains, which recently reached 8,000,000,000% from where it began trading in early July 2010, came on the heels of several catalysts.
First of all, Bitcoin’s first mover feature made it the most popular cryptocurrency with retail traders. As of late 2020, small business finance platform Fundera estimated that 15,174 companies worldwide accepted Bitcoin as a payment method — and that number has certainly grown since then.
To build on the above point, El Salvador also recognized Bitcoin as legal tender in September. It is the first country to allow Bitcoin as an accepted currency, and it could pave the way for other countries to follow.
The world’s most valuable digital currency has benefited from rapidly rising inflation in the United States and abroad as well. With Bitcoin having a perceived cap of 21 million tokens, it is viewed as an inflationary hedge against the rapidly growing money supply in the US and rising prices. In November, the CPI for all urban consumers jumped 6.8% in the US, marking the largest year-over-year jump in 39 years.
Investors seem to be clearly excited about the possibility of Bitcoin upgrading as well. In November, the long-awaited Taproot upgrade went into effect. Taproot allows smart contract transactions to occur on the network, opening the door to broader use of the Bitcoin blockchain. Smart contracts are protocols that help verify, enforce, and facilitate a contract between two parties.
Finally, even fear of missing out (or FOMO) played a role. After watching Bitcoin gain 8 billion percent, crypto investors seem more willing to overlook any threat of a comeback.
I still don’t buy Bitcoin, and you shouldn’t either
Although Bitcoin has proven me wrong over the past year, I still wouldn’t buy the most popular digital currency on the planet with free money – and I’d suggest others avoid it too. Here are some of the reasons why I can’t buy into the hype surrounding Bitcoin.
For starters, it’s not a rare icon that was made to be. Take gold as a comparison. Since we can’t use alchemy to make any extra gold, what’s left in the ground and what’s already mined is all that will ever be there. In terms of physical rarity, this is a true streak in the sand. For Bitcoin, it is the lines of code that define its “ceiling” of 21 million coins. While it is unlikely that consensus will increase the number of outstanding tokens above 21 million, it is not impossible for that to happen. Thus, Bitcoin only presents the perception of scarcity and not true scarcity.
Another big problem for Bitcoin is mitigation. But I’m not talking about the modest currency inflation that comes with cryptocurrency mining. Instead, I’m alluding to the fact that Bitcoin is a first-generation blockchain network that was left in the dust by third-generation blockchain innovation. There is absolutely no reason for Bitcoin to be worth $913 billion when blockchain projects with a fraction of its value can scale better, process faster, and process more complex transactions. Bitcoin may benefit from the first mover advantage, but the victor is rarely the first to make this foray.
History provides another reason I don’t want to do with Bitcoin. Major price swings are fairly common in the cryptocurrency space, and reversals after huge gains happen quite often. Bitcoin has surged 8 billion percent at some point since July 2010 and has yet to prove that it has staying power. Since it hasn’t been able to decouple from the stock market, I’d bet on a huge bounce after its pandemic low bounce.
To build on this earlier point, there are now far more ways to bet on bitcoin than ever before. The rise of Bitcoin-focused exchange-traded funds and Bitcoin futures offers a safer way for big-money players to bet on the downside on the world’s most popular cryptocurrency. In other words, Bitcoin becoming more mainstream as an investment will do more harm than just help.
Finally, history also tells us that investors have a really poor track record of appreciating adoption of the next big thing technologies. Looking back on the Internet, B2B commerce, genomics, 3D printing, and many of the next big developments reveal that their adoption has taken much longer than anticipated. This does not mean that blockchain cannot become a mainstream technology in payment and non-financial applications at some point in the future. But it is important to realize that companies are not willing to take advantage of the opportunity of using the blockchain until it has been thoroughly scrutinized in the real world. We are not close to that yet.
There are a lot of really interesting cryptocurrency projects that could change the trajectory of payment processing or supply chain management. Bitcoin is not one of them.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.