The last 11 months have been marked by unprecedented volatility and uncertainty for the stock market. The benchmark S&P 500 set a record for both the steepest bear market decline and quickest bounce-back rally to new highs from a bear market low in 2020.
However, one asset has been largely unfazed by this uncertainty: bitcoin.
Bitcoin euphoria has pushed it to record heights
The world's largest cryptocurrency had nearly quadrupled on a trailing-year basis through early morning, Jan. 21, 2021. This blows the nearly 16% return for the S&P 500 over the same time frame out of the water.
Most bitcoin enthusiasts will point to its scarcity, utility, and game-changing potential as the reason(s) behind its surge in value.
In terms of scarcity, a maximum of 21 million bitcoin will be mined. With approximately 18.6 million tokens already in circulation, it'll take nearly 120 more years before the final 2.4 million tokens are mined. Bitcoin "hodl-ers" (i.e., those who buy and hold bitcoin) view this fixed supply as a hedge against the ever-ballooning money supply of the U.S. dollar.
As for utility, more merchants than ever are accepting bitcoin as a form of payment. According to Fundera, there are now more than 5,000 bitcoin ATMs worldwide, with north of 15,100 global businesses accepting the most popular digital currency as payment.
Bitcoin's blockchain (i.e., the underlying ledger responsible for transparently and immutably recording transactions) is also viewed as a game-changer in the financial landscape. With the ability to process and settle transactions in mere minutes, the idea of waiting a week for overseas payments to settle could be long gone.
Bitcoin is now in a bear market, and it could stay there for a while
But in spite of all of the euphoria surrounding bitcoin, it hasn't stopped the world's most popular digital currency from falling into bear market territory. A bear market describes an asset that's declined at least 20% from a recent high. In bitcoin's case, it's fallen by 24% since hitting an all-time closing high on Jan. 8.
Historically, emotions and technical analysis (i.e., pretty charts) are what have driven bitcoin's shorter-term movements. Pull up a chart since bitcoin's inception, and you'll see that these parabolic moves are always followed by protracted periods of decline and lost interest by investors. In plain English, this bear market likely signals the potential for a long and protracted move lower by bitcoin.
Of course, it's not just emotions and fancy point-and-figure charting that have me believing the world's top digital currency is headed lower. My dislike of bitcoin as an investment is based on the leading cryptocurrency's many flaws.
Bitcoin's scarcity is based on uncertain promises
The first issue with bitcoin is the false perception of scarcity.
I often hear from bitcoin supporters that since we don't know how much gold there is on planet Earth, but we do know there's a 21 million-bitcoin token limit, bitcoin is the best example of a scarce asset. But this thinking is completely backwards. The amount of gold that exists on planet Earth, no matter what the tally, is all there'll ever be. We're talking about a physical, line-in-the-sand form of scarcity.
Meanwhile, bitcoin's scarcity is contrived from the idea that community consensus won't be reached to increase the token count. While that is a possible outcome for bitcoin, it's far from a line in the sand. Bitcoin's scarcity amounts to nothing more than the perception of a promise that the community won't raise the token limit. There's nothing concrete about that.
Bitcoin's utility is blowing smoke, not gathering steam
While bitcoin has had no trouble generating plenty of trading volume due to its wild volatility, it's not exactly been the medium of exchange that it was originally designed to be. The U.S. has 7.7 million businesses with at least one employee, according to the U.S. Census Bureau. Yet, per Fundera, only 2,300 U.S. businesses accept bitcoin. That's hardly a blip.
Furthermore, the vast majority of bitcoin are held by a small percentage of funds and large investors. Most of these tokens aren't going to find their way into general circulation for payments and spending purposes. Even with the ability to divide bitcoin tokens down to eight decimal places, there's simply not enough of it to become a game-changing form of payment.
The barrier to entry is virtually nonexistent
Another overlooked flaw with bitcoin is that there's truly nothing unique or proprietary that makes it the clear and obvious choice for digital payments or investors. For example, more than 10,000 blockchain companies were formed in China alone last year. It simply takes time and money to develop blockchain technology that may well prove superior to what bitcoin offers.
What's more, bitcoin's blockchain strictly pertains to expediting payments and settlements. In other words, it has financial applications. Ethereum, on the other hand, has more real-world applications with its blockchain, including executable smart contracts with its underlying ledger.
As the icing on the cake, we're seeing blockchain developed that may operate with fiat currencies, or perhaps with no tokens/currency whatsoever.
The bitcoin fairy tale is full of holes and continues to be driven by nothing more than emotional traders and pretty charts. With those charts not looking so pretty anymore, bitcoin's fundamental flaws will rise to the forefront and worsen its young bear market.