Ever wondered what it actually is? Or how much you should have in your portfolio? We address some of your burning questions
Cryptocurrency is all the rage. While we aren’t all buying our lattes with Bitcoin as many people predicted, the rise of cryptocurrencies have been staggering.
Bitcoin’s open-source software was released in 2009. Its value now tops $60,000 a coin and can even be used to buy Tesla’s electric vehicles. Consider that the oldest existing retail bank was founded in 1472 and the world has sped up considerably.
Cryptocurrencies, and the technology around it, is vying to be considered a legitimate asset class (many already think it is) and investors have shown increased appetite for holding and trading different cryptos.
What is it?
To be honest, this is often where people fall down. We’re used to money. A dollar is tangible, 10 of them get me (most of) a fancy salad downtown. But how do cryptos work?
A cryptocurrency is a digital asset designed to work as a medium of exchange. Coin ownership records are stored in a decentralized ledger existing in a form of computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
There are thousands of different cryptos, with Bitcoin (the first) and Ethereum the most popular and valuable. The common denominator is volatility. This is true of all currency but, with cryptos, they aren’t backed by governments or a precious metal, which makes them a much riskier investment.
How to invest?
To go direct, there are various exchanges where you can buy Bitcoin and Ethereum, like Coinbase, GDAx and Bitfinex. They will charge a fee for the transaction so there is always the option of buying them off other people via websites like LocalBitcoins, although this is substantially more risky.
Fund providers have woken up to the growth potential and Purpose Investments came out with the world’s first Bitcoin ETF, closely followed by Evolve and CI. Fund manager 3iQ has The Bitcoin Fund, The Ether Fund and the 3iQ Global Cryptoasset Fund. Other funds are available, of course, while there are a plethora of blockchain ETFs out there that seek to capitalize on the ledger technology behind the currencies.
Many believe this is where the real effect of the innovation will be felt, with the technology assisting healthcare, supply chain management and anti-fraud measures to name just three.
Som Seif, founder of Purpose Investments, told WP: “The question is can the asset be worth something, and it all comes down to whether someone else is willing to accept it as a valuable asset in the future that will dictate price.
“But what makes Bitcoin really fascinating is through intellectual property software, they have replicated in 10-11 years, what gold took 3,000 years to do. That's what’s extremely exciting – and it's all in the early stages of that journey.”
He added: “We know that there's a limited structure of supply, we know how many Bitcoins will be in supply for ever but we don't know the demand side. So, it comes down to this tipping point: does Bitcoin ultimately become a core store of value that is accepted more broadly.
“The more and more acceptance it gets, the more and more likely that the demand function will increase, and therefore, the price will be very attractive. That's where I get excited about it.
“I don't get excited about it as the changing of the world model of decentralization. I get excited about that with Ethereum. I think Bitcoin is going to be successful and exciting because it was the first and it's become such a critical store of value software platform that we know is indestructible.”
What percentage should be in your portfolio?
The answer is always: what’s your risk tolerance? Clearly, very few are going to go 100% in Bitcoin but for those investors who want to be exposed to cutting edge innovation that they believe has huge growth potential, anything up to 5% appears to be the general consensus at the time of writing. Investors, must, however, expect volatility.
Arthur Salzer, CEO of family office Northland Wealth Management, told WP: “Some of our families had reservations about us going into this asset class, but we're up 400% on it already.
“Our target exposure is probably closer to 5% but we understand how the cycle works and know when to get in and when to get out. It’s adding tons and tons of alpha to our family's portfolio – we’re trying to keep them wealthy.”
The future
Will cryptos challenge banks? Will decentralization see people swerve the much-maligned bank fees? How much will one Bitcoin really be worth in 10 years? The answer is, of course, no one knows. Whether it becomes a legitimate new asset class will take time.
Fred Pye, president and CEO of 3iQ, told WP that Bitcoin – and potentially other cryptos – can act as a hedge for the effects of the unprecedented amounted on stimulus that’s been pumped into the economy. Rather than a currency, which was Bitcoin’s initial use, he instead views it as a store of wealth.
He said: “The unbelievable amount of global liquidity that was created because of COVID possibly doesn't end well. All the wealthiest people in the world have no choice but to consider some kind of hedge against what happens when the taps get turned off because the more they open the taps, the harder the world falls when they turn them off.
“When you see some of the world's biggest and brightest money managers and companies protecting their balance sheets and protecting their net worth with Bitcoin, you can see where the demand comes from. It’s really now a digital global hedge against consistent money printing.
“But the reality is you do not use something that’s a store of wealth as a currency. Money is going digital, but it'll be digital Canadian dollars, digital U.S. dollars. You’ll be able to buy things by circumventing the banks and everything else in the future but do not get it mixed up. Yes, Bitcoin can be a peer-to peer-currency but it’s not – it’s a store of wealth.”
