Despite the increase in volatility during the fourth quarter, it was another fantastic year for the major indices and the cryptocurrency space. The reference S&P500 ended up 27% last year, with the kingpin of all digital currencies, Bitcoin (CRYPTO: BTC), which more than doubled the gain for the S&P 500.
But take a few steps back and adjust your focus for a completely different view. While the S&P 500 has doubled over the past five years, Bitcoin has catapulted higher by more than 5,000%.
While I’m personally not a fan of Bitcoin as an investment, for reasons I’ve laid out widely over the past few weeks, it’s been treated incredibly well by buy-and-hold investors for over a decade. Bitcoin’s 21 million token cap, along with its first-mover advantage and highly secure transaction model, has made it the blue chip of cryptocurrencies.
Investors who want exposure to Bitcoin have several ways to get it. The most obvious and direct way would be to buy Bitcoin on a cryptocurrency exchange. Owning Bitcoin directly allows investors to accurately mirror its movements.
Another very smart way to gain Bitcoin exposure for those with less appetite for risk and volatility would be to buy a company like To block, formerly known as Square. Although Block is best known for its ecosystem of sellers, the company’s rapidly growing Cash App service allows investors to trade Bitcoin. Block also holds a small percentage of its assets in Bitcoin.
Avoid These Dangerous Bitcoin Stocks
On the other hand, there are really undesirable ways to gain exposure to the biggest cryptocurrency in the world. Below are four of the most dangerous Bitcoin stocks, along with explanations of why they should be avoided in 2022 (and beyond).
If there’s one bitcoin stock that I would strongly suggest investors avoid, it’s the business analytics software company MicroStrategy (NASDAQ: MSTR). At this point, it’s almost not worth considering the company’s analytics software operations given that founder and CEO Michael Saylor has turned his business into a leveraged bitcoin bet.
At the end of December, MicroStrategy acquired 1,914 Bitcoins for an average price of $49,229. This increased his overall ownership to 124,391 Bitcoins at an average price of $30,159. In total, we are talking about an investment of 3.75 billion dollars which, as of January 14, had appreciated at 5.3 billion dollars.
Although Saylor was right in his leverage bet, so far there are glaring red flags with the company. Namely, MicroStrategy went from over $560 million in cash, cash equivalents, and short-term investments and no debt at the end of 2019 to just $57 million in cash and $2.15 billion in various forms. of debt in the third quarter of 2021. Saylor has rolled the dice on his company’s balance sheet and may have to issue a mountain of stock to pay off its obligations if Bitcoin does not grow in the coming years.
Additionally, Saylor apparently ignored the operations of his company’s analytics software. Although sales of product licenses and subscription services are slightly higher in the first nine months of 2021, they have been on a six-year downward trend through 2021. Saylor spending most of its time pumping Bitcoin in interviews or on social media, the company’s tangible products and services have languished.
Marathon Digital Holdings and Riot Blockchain
The second and third dangerous bitcoin stocks that should be avoided by investors are cryptocurrency miners Marathon Digital Backgrounds (NASDAQ: MARA) and Riot Blockchain (NASDAQ: RIOT). I group these two together because of their extremely similar operating models.
Cryptocurrency miners are people or companies that use powerful computers to solve complex mathematical equations that validate groups of transactions (called blocks) on the blockchain. In the case of Marathon and Riot, they both mine Bitcoin. To be the first to solve a block and validate the transactions as true, a block reward of 6.25 Bitcoin is paid. It’s worth about $267,000.
For one thing, bigger is better when it comes to Bitcoin mining. Marathon and Riot will eventually have full mining operations containing approximately 199,000 and 120,000 mining units respectively. On the other hand, the mining space has virtually no barriers to entry and new competitors regularly target Bitcoin.
To make matters worse, Bitcoin’s block reward halves every four years – the next halving is expected to take place in 2024. This means more companies are arguing over what will end up halving. Marathon and Riot will need Bitcoin to double in price just to break even once block rewards are halved.
But the biggest problem is that Marathon Digital and Riot Blockchain are entirely dependent on external factors (i.e. Bitcoin price) and not on innovation. With so much competition and risk involved, it makes no sense for Bitcoin bulls to put their money to work in crypto mining stocks.
Grayscale Bitcoin Trust
The fourth dangerous Bitcoin “stock” that I would suggest avoiding in 2022 is the Grayscale Bitcoin Trust (OTC: GBTC). If you’re wondering why “stock” is in quotes, it’s because, as the name suggests, this security is a trust and acts more like a closed-end fund than an actual stock.
The premise here is simple: Grayscale Bitcoin Trust acquires Bitcoin to hold it, and these assets should, in theory, rise or fall in value at the same level as Bitcoin’s price. It is an alternative investment option for those who do not feel comfortable buying Bitcoin directly through a cryptocurrency exchange.
However, history has shown that the Grayscale Bitcoin Trust has failed to accurately reflect the price movements of its underlying security. A few years ago, its issue premium could be up to 100% higher than its net asset value (NAV). These days, it’s valued at over 20% off its net asset value.
In November, Bobby Blue of the morning star laid out the Grayscale dilemma for the world to better understand. As it is a trust, the only entity capable of creating and deleting shares from the market is Grayscale; and Grayscale does so only through a series of private placements and buyouts from accredited investors at sporadic times throughout the year. Instead of the number of shares outstanding matching demand, the restrictions on this trust result in wide disparities between its stock price and net asset value. Unless Grayscale Bitcoin Trust can convert to an exchange-traded fund (ETF), these inefficiencies will persist.
Finally, paying a 2% management fee seems excessive for a trust that only manages private placements and redemptions a few dozen times a year.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.