In less than a week, investors can pop the champagne and celebrate another successful year. through december on jan 22, the widely followed s&p 500 was 25% higher, which is more than double its average annual total return of about 11%, including dividends, since early from 1980.
But it is the cryptocurrency space that offers the juiciest returns of all. Since the year began, the added value of all digital currencies has nearly tripled. It’s no surprise that bitcoin (btc 1.48%) has been one of the biggest contributors to this rise in face value, with a 67% gain year to date. it represents 40.5% of the entire $2.27 trillion cryptocurrency market.
Reading: Why still won invest bitcoin
bitcoin more than doubled s&p 500 gains in 2021
Bitcoin’s gains, which recently peaked at 8,000,000,000% from where it began trading in early July 2010, have come on the heels of numerous catalysts.
For starters, bitcoin’s first mover advantage has made it the most popular cryptocurrency among retailers. At the end of 2020, the small business financing platform Fundera estimated that 15,174 businesses worldwide accepted bitcoin as a form of payment, and this number has certainly increased since then.
To complement the previous point, bitcoin was also recognized by El Salvador as legal tender in September. it is the first country to allow bitcoin to be used as an accepted currency and could pave the way for other nations to follow.
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The world’s most valuable digital currency has benefited from rapidly rising inflation in the us. uu. and abroad too. Since bitcoin has a perceived cap of 21 million tokens, it is seen as an inflationary hedge against rapid US growth. uu. money supply and price rises. in november, the consumer price index for all urban consumers rose 6.8% in the us. US, marking the largest year-over-year jump in 39 years.
Investors also seem to be clearly excited about bitcoin’s upside potential. in november the long-awaited taproot update went into effect. taproot enables 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 the fear of missing out (or fomo) has played a role. After seeing bitcoin gain 8 billion percent, crypto investors seem more than willing to overlook any threat of a reversal.
I still don’t buy bitcoins and neither should you
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 would suggest others avoid it as well. Below are some of the reasons why I just can’t accept the hype surrounding bitcoin.
for starters, it’s not the scarce token it’s supposed to be. take gold as a comparison. Since we can’t use alchemy to make extra gold, what’s left in the ground and what’s already been mined is all there will be. in terms of physical scarcity, that’s a real line in the sand. As for bitcoin, the lines of code are what limit its “cap” of 21 million coins. although it is unlikely that the consensus will increase the number of tokens in circulation above 21 million, it is not impossible that it will happen. therefore, bitcoin only offers the perception of scarcity and not true scarcity.
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Another big problem for bitcoin is dilution. but I’m not talking about the modest coin inflation that comes with cryptocurrency mining. rather, i am alluding to bitcoin being a first generation blockchain network that is being abandoned by third generation blockchain innovation. There is absolutely no reason for bitcoin to be worth $913 billion when blockchain projects at a fraction of its value can scale better, process faster, and handle far more complex transactions. bitcoin may be benefiting from first-mover advantage, but first-mover is rarely the victor.
History provides yet another reason why I want nothing to do with bitcoin. Big price swings are a common thing in the crypto space, and reversals following big gains happen frequently. bitcoin is up 8 billion percent at one point since July 2010 and has yet to prove that it really has staying power. Given that it has not been able to disengage from the stock market, it would be betting on a significant reversal after its minimal pandemic bounce.
To continue on this earlier point, there are now many more avenues to bet against bitcoin than ever before. The rise of bitcoin-focused exchange-traded funds and bitcoin futures offers a safer way for deep-pocketed players to bet short on the world’s most popular crypto. In other words, bitcoin becoming more common as an investment will do more harm than good.
And finally, history also tells us that investors have a very poor track record when it comes to estimating the adoption of the next big technologies. looking back at the internet, business-to-business commerce, genomics, 3d printing, and so many upcoming breakthroughs, reveals that their adoption took much longer than expected. This is not to say that blockchain may not become a mainstream technology in payment and non-financial applications at some point in the future. but it is important to recognize that companies are not willing to take the opportunity to use blockchain until it has been thoroughly investigated in the real world. we’re just not even close to that yet.
There are many cryptocurrency projects that are really interesting and could change the course of payment processing or supply chain management. bitcoin just isn’t one of them.
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