For more than a century, Wall Street has been unrivaled in the profit column. Although we've witnessed short periods where housing and commodities like gold have outperformed equities, stocks have handily surpassed the average annual return of all other assets over the very long run.
But things changed when cryptocurrencies made their debut a little over a decade ago. Since then, a number of high-profile digital currencies have run circles around the broader market and even the top-performing stocks.
Bitcoin, Ethereum, and Dogecoin run circles around Wall Street
For example, Bitcoin (BTC 1.41%), the world's largest cryptocurrency by market cap, could once be purchased for less than $1. As of May 5, it would cost more than $57,000 to buy a single Bitcoin.
The same can be said for Ethereum (ETH 3.82%) and Dogecoin (DOGE 2.42%), which round out the three most popular cryptocurrencies. In September 2015, a single Ether token could be purchased for about $0.50. This week, those same tokens surpassed $3,500.
As for Dogecoin, it could be purchased for $0.0001 (that's one one-hundredth of a penny) as recently as 2015, but now goes for almost $0.65. That's a 650,000% return in six years. Put another way, if you purchased $155 worth of Dogecoin at $0.0001 in 2015, you're now a millionaire with it at $0.65.
The euphoria surrounding these leading cryptocurrencies varies by the coin, but many share a couple of common denominators. For one, there's the strong belief that the future of payments lies with blockchain -- i.e., the digital and decentralized ledger responsible for recording transactions without the need for a third-party provider.
In the case of Bitcoin and Dogecoin, there's the potential to expedite the time frame whereby payments are validated and settled. Using traditional banking networks means waiting up to a week for cross-border payments to validate and settle. With Bitcoin and Dogecoin, these settlements can occur in about 10 minutes and 20 minutes, respectively. Note that Ether, the Ethereum network token, is not often used as a payment coin, which is why I'm excluding it from this aspect of the discussion.
Where Ethereum could come into play is outside the financial spectrum. Ethereum's blockchain and its incorporation of smart contracts -- protocols that verify, facilitate, or enforce the negotiation of a contract -- could revolutionize global supply chains and eliminate hard-to-track paper trails.
The big three of Bitcoin, Ethereum, and Dogecoin are also being purchased by investors as a hedge against what's seen as the constant devaluing of the U.S. dollar as a result of a quickly growing money supply. Note that Bitcoin is the only major cryptocurrency to have a "fixed" token supply. I say "fixed" in quotation marks since community consensus could always increase the token count. While unlikely, it's not impossible.
Lastly, the common theme this trio shares is investors all tout their increased utility. There's the perception that more businesses than ever are accepting digital currencies, and that their respective networks are handling a greater number of transactions.
However, dig a bit deeper into this last point, and you'll find a figure that virtually guarantees these major cryptocurrencies are in a massive bubble.
This implies we're in the midst of a major crypto bubble
A core thesis for crypto optimists is the increased adoption of these coins, whether by businesses or via blockchain transactions.
According to daily transaction data from BitInfoCharts.com, Ethereum has seen a steady uptick in use over the past year. Simply eyeballing 365 days' worth of data, it's averaged around 1.1 million transactions per day. Meanwhile, Bitcoin's transactions per day haven't budged over the past year, with the leading digital currency handling around 300,000 transactions per day. Lastly, Dogecoin has had some recent spikes in daily transactions but has averaged closer to 50,000 transactions daily over the past year.
Altogether, the big three are in the neighborhood of 1.5 million transactions per day (rounded up), and their combined market value is $1.56 trillion -- Bitcoin ($1.07 trillion), Ethereum ($403 billion), and Dogecoin ($83 billion).
But according to The Nilson Report released in 2020, there were 368.92 billion credit card transactions worldwide in 2018 for goods and services. That's 1.01 billion transactions, on average, per day! Keeping in mind this data is more than 2 years old, the big three of crypto account for less than 0.15% of all the transactions conducted on a daily basis if compared to credit cards.
What's more, Visa (V 0.58%) and Mastercard (MA 1.62%), which are the global processing kingpins, were responsible for 165.3 billion and 90.2 billion of the aforementioned 368.92 billion credit card payments in 2018. That's 69% of all credit transactions globally routed through one of these two networks. Yet, Visa and Mastercard sport market caps of "only" $504 billion and $366 billion, respectively.
While we're not talking about a perfect apples-to-apples comparison here, the combined valuation of Visa and Mastercard ($870 billion) is only 56% that of the aggregate value of Bitcoin, Ethereum, and Dogecoin. Yet, Visa and Mastercard handled 700 million transactions globally each day in 2018, or in the neighborhood of 470 times more transactions per day than Bitcoin, Ethereum, and Dogecoin are handling on a combined daily basis over the trailing year.
It's really common for investors' imaginations to outrun the uptake of next-big-thing technology, and I believe that's what we're seeing in this data. Digital currencies aren't for-profit businesses like Visa and Mastercard, but to have a combined $1.56 trillion valuation and handle just a puny fraction of what Visa and Mastercard are capable of on a daily basis demonstrates what a mammoth bubble is brewing.
Correction: The original version of this report misstated how much Dogecoin you would have needed to own in 2015 to have a million-dollar position today. We're sorry for the error.