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The Rise of Bitcoin: What you need to know

by | Feb 22, 2021 | Investing

There is something other than GameStop and how a group of netizens took on Wall Street that has investors excited1. Bitcoin. It seems everywhere you turn there is a headline about the cryptocurrency.

Here are a few of the latest stories. Rapper Jay-Z and Twitter CEO Jack Dorsey have partnered to launch a fund that will encourage the adoption of Bitcoin in Africa and India2. Closer to home, America’s oldest bank, BNY Mellon, announced that it will trade in Bitcoin and other cryptocurrencies on behalf of its asset-management clients.3  Elon Musk’s Tesla also announced that it purchased $1.5 billion worth of Bitcoin and is considering accepting Bitcoin as a method of payment.4

All of this news is helping to drive up the price of Bitcoin and other digital currencies. At the time of writing, one Bitcoin was worth nearly $60,000 Canadian dollars. This is more than double its record high in December 2020.5 But why are we seeing all this momentum now? Especially when you consider Bitcoin has been around since 2009?6

The biggest reason is that for the first time, institutional investors and major corporations are taking Bitcoin and all cryptocurrencies seriously. This includes the likes of BNY Mellon, as well as PayPal, Square, Visa, JPMorgan, Fidelity and others that are adding digital currencies to their product lines. For example, Visa-branded Bitcoin rewards credit and debit cards are in the works. Fidelity has already launched its first Bitcoin investment fund.7

The pandemic and all of the resulting stimulus spending has also helped push up the values of digital currencies. Why? They are moving into the role gold has typically played as a hedge when paper currency is being devalued. In this case, trillions of dollars are being printed to help people and businesses come through the pandemic. The longer the negative economic impact of the pandemic persists, the more investors seek out alternatives. It’s no accident that the price of gold is up, too.

For investors considering investing in cryptocurrencies, my best advice is to proceed with extreme caution — and do your homework. This is a highly risky investment, particularly since there is no way to know for sure how mainstream cryptocurrencies will be in the coming years.

Here is a very quick primer on cryptocurrencies and what you need to know:

  • Investopedia defines digital currencies as currencies that are only available in electronic form, which means you can only access them from computers or mobile devices.8 There are no physical assets and, unlike other currencies, they aren’t issued by a government, nor are they tied to the U.S. dollar. While they are not currently recognized as official currencies, this could be changing. Bloomberg reports the Bank of Canada is taking the steps to introduce a digital currency at some future point in time.9
  • Bitcoin is the world’s first decentralized digital currency and has paved the way for many others, including Ethereum and Ripple, for example. They can be used online to make purchases but only where accepted by service providers.
  • Digital currencies are based on blockchain technology and run on a network of interconnected but independent computers that form a decentralized leger system. All transactions are copied on every computer in the network and each transaction is recorded on the ledger with a unique encrypted signature. This ensures transparency and security.
  • Bitcoins are created through a process called mining that involves using sophisticated computers to solve complex math problems. There are only a finite number of Bitcoins that can be mined. Supply has been capped at 21 million coins. To date, about 18.5 million coins have been created. This scarcity is what gives Bitcoin value.10
  • Digital currencies can be traded on online exchanges, such as Bitbuy, Coinsquare or Quadriga. Square also allows the buying and selling of Bitcoin on its CashApp.11 It is now possible to buy Bitcoin inside close-ended mutual funds. Much like Exchange Traded Funds (ETFs) that mimic an underlying index, these funds track the price of Bitcoin. Speaking of ETFs, the Ontario Securities Commission has just approved North America’s first publicly traded Bitcoin ETF.12
  • Cryptocurrencies are stored in virtual wallets, which you can access from your computer or mobile device. If you don’t need easy access to your cryptocurrency, which is really just a digital code, you can store it in a hardware wallet that resembles a USB drive.
  • Just as with other investments, capital gains and losses attributed to digital currencies have to be reported to the CRA.

Like any other investment, if you’re trying to decide whether or not to invest in Bitcoin or other cryptocurrencies, you have to consider your own risk tolerance, your investing objectives, and the asset mix within your existing portfolio. If you’re risk averse and looking to build wealth over the long term, this likely isn’t the right investment for you. At this stage, cryptocurrencies are unpredictable and volatile.

Call Me or Email Me
My approach to investing is straightforward. I study the markets, global economies and what’s happening within industries to be in a position to best help my clients find good quality investments that will help them meet their goals. I build custom portfolios for each client. I welcome you to call me at 416-332-3863 or email me at allan@allansmall.com.

References

      1. What Americans Think About The GameStop Investors, FiveThirtyEight
      2. Jay-Z, Twitter’s Jack Dorsey Establish $24 Million Fund to Develop Bitcoin, Variety
      3. Bitcoin to come to BNY Mellon, America’s oldest bank, Market Watch
      4. Tesla buys $1.5 billion in bitcoin, plans to accept it as payment, CNBC
      5. What is the Price of Bitcoin, Bitcoin Price
      6. What Is Bitcoin?, Investopedia
      7. Bitcoin breaks $40,000 as 2020 surge continues into new year, Yahoo! Finance
      8. Digital Currency, Investopedia
      9. Bank of Canada eyes launch of digital currency, BNN Bloomberg
      10. Why Investors Are Piling Into Bitcoin Despite the Risks, YouTube – Wall Street Journal
      11. Square, Inc. Invests $50 Million in Bitcoin, Square
      12. First North American Bitcoin ETF Approved by Canadian Securities Regulator, Yahoo! Finance