Here we go again: Bitcoin, Ethereum, and Ripple are skyrocketing

The "Big Three" of crypto have gained between 187% and 356% over the past eight months. Is this sustainable?

cryptocurrency

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

It's been a wild year for Wall Street and the investment community. The unprecedented coronavirus (COVID-19) pandemic wiped away over a third of the S&P 500 Index (INDEXSP: .INX) value in about a month earlier this year, with the benchmark index logging its 10 largest single-day point losses and 8 biggest single-session point gains in history in 2020. 

These wild vacillations in equities have been akin to financial whiplash for investors.

The 'Big Three' of cryptocurrency are unstoppable, once again

But not all assets received the memo that it was time to panic. Digital cryptocurrencies have been on fire since March, with the three largest digital tokens by market cap – bitcoin, Ethereum, and Ripple – leading the way. Since the stock market bottomed out on March 23, 2020, bitcoin, Ethereum, and Ripple have respectively gained 187%, 356%, and 289%, through the early evening of Nov. 23.

Why the resurging interest in cryptocurrencies after 2017's price run and burst bubble? The best guess I can offer is the continued push toward cashless and digital payments. The COVID-19 pandemic has made consumers question their payment choices, with cash viewed as a potential harbinger of germs. As millennials and Generation Z have aged, they've grown into a larger percentage of the consumer pool. They've been far more willing than Gen Xers or boomers to embrace digital payment options.

Investors are also likely excited about the real-world applications for certain cryptocurrencies and their underlying blockchain technology. Blockchain is the digital and decentralised ledger responsible for recording all transactions without the assistance of a third-party provider. The expectation is that blockchain can improve security via its decentralisation, as well as expedite the settlement of transactions – especially international payments.

Individual stories are at play, too. Bitcoin has become the go-to intermediary on crypto trading platforms for virtually all activity. If investors want to buy tokens of anything other than a major cryptocurrency, they're going to first have to purchase bitcoin for exchange purposes.

Bitcoin's trading popularity has been especially evident with digital payment platforms PayPal and Square. In October, PayPal announced that it would be launching a new service that'll allow its customers to buy, sell, and hold cryptocurrency directly in their PayPal account.  Meanwhile, Square has seen its revenue skyrocket due to bitcoin exchange on peer-to-peer payment platform Cash App. Square also acquired about $50 million worth of bitcoin tokens.  Cryptocurrency stocks have been skyrocketing right along with digital tokens.

Another example is Ethereum's smart contracts, which are built into its blockchain. These smart contracts help verify transactions and enforce contract negotiations. As an example, products for a business could be automatically reordered once total sales reach a certain level, if multiple parties agree. These smart contracts could completely revamp supply chain management.

This hasn't ended well before, and this time won't be any different

For millennial and novice investors, cryptocurrencies like bitcoin, Ethereum, and Ripple are like a dream come true. They vacillate wildly on a regular basis and can yield triple-digit gains in a matter of weeks if investor sentiment behind a token is strong enough.

But we've seen digital tokens go vertical a few times before, and it hasn't ended well for crypto investors. The way I see it, crypto investors are fighting an uphill battle against three very real problems.

First, at least with regard to bitcoin, there's a perceived scarcity problem. Bitcoin is often viewed as a direct threat to gold as a store of value and potential stock market hedge given its "cap" of 21 million mined tokens (there are currently 18.55 million tokens in circulation). The issue is that these circulating supply caps aren't tangible like gold. This is to say that we can only mine the amount of gold found on planet Earth. By comparison, programming is all that keeps bitcoin's virtual cap in place.

A second but far more concerning issue for bitcoin, Ethereum, and Ripple is utility. In 2017, global gross domestic product totaled $81 trillion. Yet as of Monday, Nov. 23, all circulating bitcoin had a market value of roughly $340 billion. Of this $340 billion, approximately 40% is being held by investors and is not in circulation for payments. This essentially means that only around $200 billion worth of bitcoin is available for transactional purposes. Aside from the fact that only between 1% and 3% of businesses accept crypto as a form of payment (according to Matthew May, the co-founder of financial firm Acuity), roughly $200 billion in circulating supply has little chance of becoming mainstream. 

There's also zero guarantee that crypto tokens will be necessary. Brand-name financial service and technology companies are developing blockchain technology of their own that may be able to operate with fiat currencies, thus rendering arbitrary digital tokens obsolete.

The third big concern here is security. Although blockchain is designed to be more protective of users' digital assets, a number of large-scale token thefts have occurred over the past decade. The issue isn't so much that thieves are out to get your crypto tokens so much as that the Securities and Exchange Commission (SEC) can't do much to stop it or help those affected. With most crypto trading and payments occurring outside the US, the SEC has no way to pursue action against these cybercriminals.

I believe that what we're seeing in the crypto market is nothing more than sentiment-driven trading without any substance behind it. More than a century of investing history has shown that investor sentiment is impossible to predict, and it can shift at the drop of a dime. Ether and Ripple have previously undergone extended declines of more than 90%, and bitcoin retraced well over 80% on a handful of occasions. It's happened before, and it's quite possible it could happen again.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Sean Williams owns shares of Square and has no position in any cryptocurrencies mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings and Square and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia has recommended PayPal Holdings. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A man wearing a red jacket and mountain hiking clothes stands at the top of a mountain peak and looks out over countless mountain ranges.
International Stock News

Has Nvidia's stock finally peaked?

Could this be the start of a much larger sell-off in Nvidia's stock?

Read more »

Rede arrow on a stock market chart going down.
International Stock News

Why Nvidia stock is sinking again

Earnings season has kicked off for the "Magnificent Seven." What does this mean for Nvidia?

Read more »

Man pumping petrol
International Stock News

Tesla's Q2 disappoints, but there's more to the story

Here's why the second quarter could be better than it appears, and why 2025 can't come soon enough.

Read more »

A man sits wide-eyed at a desk with a laptop open and holds one hand to his forehead with an extremely worried look on his face as he reads news of the Bitcoin price falling today on his mobile phone
International Stock News

Why Tesla stock just crashed

Tesla stock looks like the "Bad News Bears" of the auto industry.

Read more »

A man sits in casual clothes in front of a computer amid graphic images of data superimposed on the image, as though he is engaged in IT or hacking activities.
International Stock News

What did Nasdaq high flyers Tesla and Alphabet just report?

Nasdaq earnings season continues with Google-parent Alphabet and Tesla reporting overnight.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

Nvidia stock has pulled back over 10%. Here's what history says could happen next

Nvidia has a 100% success rate of rebounding after pullbacks of 10% or more. Will this time be different?

Read more »

Digital rocket on a laptop.
International Stock News

Why Nvidia stock jumped on Monday

Nvidia investors got some big news, and the stock is also getting a boost thanks to bullish Wall Street analysts.

Read more »

a group of business people sit dejectedly around a table, each expressing desolation, sadness and disappointment by holding their head in their hands, casting their gazes down and looking very glum.
International Stock News

Why CrowdStrike stock just crashed again

There likely isn't a quick way to restore confidence.

Read more »