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.
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 (NASDAQ:RIOT) and Bit Digital (NASDAQ:BTBT). 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.
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 (NYSE:GME) 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…