Investing in the stock market is always a bit of an adventure. Last year, the unprecedented coronavirus disease 2019 (COVID-19) pandemic took the investing community on a historic ride. The first quarter of 2020 delivered the fastest bear market nosedive on record, while the subsequent months gifted the investing community with one of the strongest bounce-back rallies of all time.
In many respects, the catalysts currently in place support aggressive valuations. Historically low lending rates and ongoing fiscal stimulus from Washington are a dream come true for fast-paced growth stocks.
But in some instances, investors have gotten carried away with the premiums they're willing to pay. The following three investing bubbles look nothing short of treacherous and may be ready to burst.
Image source: Getty Images.
Cryptocurrency and crypto-focused stocks
To begin with, almost anything having to do with cryptocurrency looks extremely frothy. Though there are a handful of ancillary cryptocurrency stocks generating a small amount of revenue from the digital token craze that should be just fine no matter what happens, the vast majority of stocks where crypto is the primary focus are downright dangerous investments.
As I've made crystal clear on numerous occasions, I believe bitcoin is in a massive bubble that's nearing another extended bear-market cycle. It's an asset that's touted for its scarcity and utility, but it looks to have neither. For instance, bitcoin's 21 million token limit is held in place by loose promises and nothing tangible. Community consensus could very well increase this token count in the future.
Likewise, Fundera finds that only 2,300 businesses in the U.S. are accepting bitcoin as a form of payment. That's hardly a blip relative to the 7.7 million businesses in the country with at least one employee. Further, with most bitcoin being held by a small percentage of investors, there's not nearly enough circulating tokens for bitcoin to offer game-changing payment utility.
The bubble potential is especially noticeable in crypto stocks focused on mining bitcoin, such as Riot Blockchain (RIOT 10.13%) and Bit Digital (BTBT 2.59%). Rather than having innovation drive share price appreciation, Riot Blockchain and Bit Digital are almost entirely reliant on the value of bitcoin to make their mining operations worthwhile. Considering how capital-intensive mining can be, it's not clear that Riot or Bit Digital can be profitable, even with bitcoin currently north of $35,000 per token.
History has shown time and again with bitcoin that drawn-out bear market cycles are the norm following blow-off parabolic moves. That makes crypto and crypto stocks solid candidates to burst in 2021.
Image source: Getty Images.
Reddit-fueled stocks
Perhaps the most treacherous bubble of all is the hype created by retail investors on Reddit's WallStreetBets chatroom.
For the past couple of weeks, retail investors on WallStreetBets have essentially banded together to buy shares and out-of-the-money call options on stocks that are either heavily short-sold or have very low floats. By piling into these short-sold stocks, retail investors are aiming to create a short squeeze -- a situation where pessimists head for the exit at once and cause a stock's share price to stampede even higher. The problem is that none of these moves have been supported by anything tangible, and are thusly doomed to fail.
Video game and accessories company GameStop (GME 1.07%) has been the poster child of the Reddit rally, with its stock skyrocketing more than 1,600% in January. Then again, shares of GameStop lost 84% of their value in just four sessions last week (Feb. 1, through Feb. 4). No matter how much chatter you hear from the Reddit community, we're talking about a company that's predominantly a brick-and-mortar presence in a gaming world that's shifting to digital platforms. Were that not enough, GameStop has also lost money three consecutive years.
While the GameStop bubble has effectively burst, the Reddit raids on individual stocks or industries have not ceased. Chances are extremely high that the short-term gains associated with the stocks these retail investors tout will prove fleeting in 2021.
The electric EC6 SUV, which was launched in July 2020. Image source: NIO.
Electric vehicles
A third investing bubble that could come crasing back to Earth soon enough is electric vehicles (EVs).
It's not hard to understand why investors have been so excited about EVs. By 2035, approximately half of all vehicles sold in China will run on alternative energy, with the overwhelming majority of those being EVs, according to the Society of Automotive Engineers of China. Meanwhile, the Edison Electric Institute estimated in 2018 that the number of EVs on American roadways would catapult from 1 million to 19 million between 2018 and 2030. In short, EVs are the future of the automotive industry, and investors have been willing to pay nosebleed prices to buy into EV-focused auto stocks.
But let's take a step back for a moment and really see what investors are buying into.
China-based NIO (NIO -5.00%) has delivered over 7,000 EVs in two consecutive months. That brings its production since inception to more than 82,000. However, NIO is lugging around a $90 billion valuation despite having delivered as many vehicles in its existence as giants like General Motors can produce in a few days. Even with NIO's innovative battery-as-a-service model that lowers the upfront cost of its EVs in exchange for enrolling buyers into a monthly fee-based program, there's simply no way to justify a $90 billion valuation on a relatively new company that's losing money in an industry known for mediocre margins.
There's no question that EVs can be a big-money industry. However, history has shown that all next-big-thing investment bubbles over the past quarter of century have eventually popped. It's not a matter of if the EV auto stock bubble will burst -- it's simply a matter of when.