For more than a century, Wall Street has been unrivaled in the earnings column. Although we have seen short periods where housing and commodities like gold have outperformed stocks, stocks have easily outperformed the average annual return of all other very long-term assets.
But things changed when cryptocurrencies first appeared just over a decade ago. Since then, a number of high-profile cryptocurrencies have traded around the broader market and even high-performing stocks.
Bitcoin, Ethereum, and Dogecoin run in circles around Wall Street
for example, Bitcoin (CRYPTO: BTC)The world’s largest cryptocurrency by market capitalization, can be purchased once for less than one dollar. As of May 5, it will cost more than $57,000 to buy one Bitcoin.
The same can be said about Ethereum (CRYPTO: ETH) And Dogecoin (CRYPTO: DOGE), which approximates the three most popular cryptocurrencies. In September 2015, one Ether token could be purchased for $0.50. This week, those same coins crossed $3,500.
As for Dogecoin, it could be bought for $0.0001 (one hundredth of a penny) until 2015, but now it’s close to $0.65. That’s a 650,000% return in six years. In other words, if you bought $155 Dogecoin at $0.0001 in 2015, you are now a $0.65 millionaire.
The euphoria surrounding these leading cryptocurrencies varies by coin, but many share two things in common. First, there is a strong belief that the future of payments lies in the blockchain – 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 is potential to speed up the time frame within which payments are validated and settled. Using traditional banking networks means waiting up to a week for cross-border payments to be validated and settled. With Bitcoin and Dogecoin, these settlements can occur in about 10 minutes and 20 minutes, respectively. Note that Ether, the token of the Ethereum network, is not often used as a payment currency, which is why I exclude it from this aspect of the discussion.
Where to play Ethereum is outside the financial realm. The Ethereum blockchain and its integration of smart contracts – the protocols that verify, facilitate or enforce contract negotiation – could revolutionize global supply chains and eliminate hard-to-track paper trails.
The Big Three of Bitcoin, Ethereum, and Dogecoin are also being bought by investors as a hedge against what is seen as a continuing decline in the value of the US dollar as a result of a rapidly increasing money supply. Note that Bitcoin is the only major cryptocurrency that has a “fixed” token supply. I say “constant” in quotes because the community consensus can always increase the number of tokens. Although it is unlikely, it is not impossible.
Finally, the common theme these three stocks have in common is that investors tout their increased interest. There is a perception that more companies are accepting digital currencies than ever before, and their networks are handling more transactions.
However, dig a little deeper into this last point, and you will find a number that virtually guarantees that these major cryptocurrencies are in a huge bubble.
This means that we are in the midst of a huge crypto bubble
One of the primary thesis of crypto-optimists is the increased adoption of these currencies, both through businesses and via blockchain transactions.
According to daily transaction data from BitInfoCharts.com, Ethereum has seen a steady rise in usage over the past year. Just look at the data for 365 days, averaging about 1.1 million transactions per day. Meanwhile, daily Bitcoin transactions have not budged over the past year, with the leading digital currency handling around 300,000 transactions daily. Finally, Dogecoin has seen some recent spikes in daily transactions but has averaged close to 50,000 transactions per day over the past year.
In all, the Big Three are near 1.5 million transactions per day (approximately), and they have a combined market capitalization of $1.56 trillion – Bitcoin ($1.07 trillion), Ethereum ($403 billion), and Dogecoin ($83 billion).
But according to a 2020 Nilson report, 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! Considering that this data is more than two years old, the top three accounts of cryptocurrency account for less than 0.15% of all transactions made on a daily basis when compared to credit cards.
What is more, Visa (NYSE: V) And Master Card Credit Card (NYSE: MSc), which are major global processors, were responsible for 165.3 billion 90.2 billion of the aforementioned 368.92 billion credit card payments in 2018. This represents 69% of all credit transactions globally across one of these two networks. However, the “only” sports Visa and Mastercard market capitalization is $504 billion and $366 billion, respectively.
While we’re not talking about a perfect apple-to-apple comparison here, the combined valuation of Visa and Mastercard ($870 billion) represents only 56% of the total value of Bitcoin, Ethereum, and Dogecoin. However, Visa and Mastercard handled 700 million transactions globally each day in 2018, or about 470 times more daily transactions than Bitcoin, Ethereum and Dogecoin handled on a combined daily basis over the following year.
It’s really common for investors’ imaginations to outpace the technology of the next big thing, and I think that’s what we’re seeing in this data. Cryptocurrencies are not a for-profit business like Visa and Mastercard, but having a combined valuation of $1.56 trillion and handling a fraction of what Visa and Mastercard are able to do each day illustrates what a huge bubble is brewing.
Correction: The original version of this report miscalculated how much Dogecoin I needed to own in 2015 to hold a million dollar position today. We are sorry for the error.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.