New alternative
The dramatic rise in the value of Bitcoin cryptocurrency on the markets has caught the attention of many people. Even though it is a virtual currency, Bitcoin has two sides, just like a traditional coin. On one side: its use as an alternative payment method to cash and credit cards. On the other: its use as an asset class in an investment portfolio.
Let’s now analyze these two aspects.
Bitcoin’s transactional potential
A few years ago, there were questions as to whether cryptocurrencies could have an impact on the traditional exchange and payment structure. Many experts now agree that a currency like the current Bitcoin is unlikely to have such an effect.
Although the value of Bitcoin has risen sharply in recent years, it’s clear that the number of transactions per second carried out with this currency has fallen by half since 20171. Transaction costs and execution delays are among the main reasons for this decline.
Another observation: people who hold Bitcoins tend to keep them rather than trade them. Generally, the most attractive prospects for this virtual currency are transfers of large sums internationally. Using a common currency and paying relatively low fees because they are unrelated to the amount transferred could favour such usage.
Bitcoin in an investment portfolio
Now let’s look at Bitcoin as an asset class you could invest in. Some believe that Bitcoin will evolve like gold, a precious commodity, but without the significant price fluctuations linked to supply, since the number of tokens issued is capped at 21 million2.
Bitcoin, however, is extremely volatile. Since 2017, its volatility rate has been around 76%3. So before buying it, an investor should know that holding even a small position in this asset could have a significant impact on both the return of their portfolio and the risk incurred.
Building legitimacy
Unlike gold, Bitcoin still lacks consensus among investors and its price remains subject to different valuations, depending on the method used. In a speech last February4, U.S. Treasury Secretary Janet Yellen summed up the situation nicely by noting that important questions concerning the legitimacy and stability of Bitcoin remain to be resolved.
Bubble or not?
And then there are those who consider the rise of Bitcoin to be the biggest bubble in history. Since the start of 2019, the value of Bitcoin has increased by 1,000%5. By comparison, during the tech bubble at the start of the millennium, the information technology sector grew by 400% between 1995 and March 20006, when the famous bubble burst.
At what cost?
As one of our portfolio managers put it so well, the blockchain technology on which Bitcoin is based is very interesting. The resulting product, however, is much less so.
As for ESG, investors who want to integrate environmental, societal and governance factors into their investments may be surprised to learn that the amount of electricity required to produce this currency generates a carbon footprint equivalent to that of all of New Zealand.
It is also suspected that due to difficulties related to its traceability, many transactions involving the cryptocurrency are linked to illegal activities. So we can expect the implementation of regulations in the coming years in order to counter the risk of fraud and money laundering.
A virtual future
Will Bitcoin become the currency of the future? It’s still far too early to say, but in the current context, caution is in order. First, consider the reasons why you built your investment portfolio and the objectives it must meet (major life projects, your retirement needs, those of your family), and think about your decisions before investing. Better yet, talk to your fdp advisor and ask them your questions: together, you can find the solutions and strategies best suited to your situation.
For now, just as it was during the great gold rush, Bitcoin is much more for adventurers than investors. Only the future will reveal its real significance…
To learn more, don’t hesitate to contact your advisor.
Stéphane Girard, MBA, CIM®, Fin. Pl.
Investment and Product Knowledge Specialist
1Todd MATTINA and Jules BOUDREAU. « Le bitcoin, plus semblable à un actif qu’à une monnaie », [Online], Perspectives sur les marchés, Mars 2021, Placements Mackenzie. [https://www.mackenzieinvestments.com/content/dam/mackenzie/fr/insights/mi-todd-mattina-monthly-commentary-march-fr.pdf].
2 Same.
3 Same.
4 Jeff COX. « Yellen sounds warning about ‘extremely inefficient bitcoin », [Online], February 23, 2021. [https://www.cnbc.com/2021/02/22/yellen-sounds-warning-about-extremely-inefficient-bitcoin.html].
5 Paul R. LA MONICA. « Bitcoin rally may be the ‘mother of all bubbles’ says BofA », [Online], Markets Now, January 8, 2021, CNN Business. [https://www.cnn.com/2021/01/08/investing/bitcoin-bubble/index.html]
6 Ben GEIER. « What Did We Learn From the Dotcom Stock Bubble of 2000? », [Online], History Economy, March 12, 2015, Time. [https://time.com/3741681/2000-dotcom-stock-bust/].
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.
