1. What is cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography which makes it’s nearly impossible to double spend or counterfeit. Bitcoin which I’m sure most of you have heard of and being the most popular is a crypto or digital currency.
2. What is a blockchain and why is it important to digital currencies?
Most cryptocurrencies are decentralized and based on blockchain technology. A blockchain a specific kind of record keeping technology. As new data comes in it is entered as a block and is chained to a previous block. It is a distributed ledger enforced by a network of independent computers. This allows for a decentralized framework which is also part of the appeal of cryptocurrencies. No specific person has control and all users collectively retain control. Blockchain data is irreversible and permanently recorded.
3. What is the attractiveness of digital currencies?
One of the defining virtues of cryptocurrency is that it is not issued by a central government. It is therefore not subject to manipulation by central banks. One of the things I find interesting is how the governor of the Bank of Canada may believe that by issuing a Canadian Government recognized digital currency it would be widely accepted and utilized, when one of the main reasons current cryptocurrency is gaining acceptance is based on not having ties to any one government or region. Basically, it is a distrust of central bankers that is causing the rise in digital currency popularity.
4. How is cryptocurrency valued?
Digital currencies are valued entirely based on supply and demand. There are virtual marketplaces across the globe where transactions take place that set the price. But the price is entirely market based. Futures now trade on Bitcoin in the USA which also helps with price discovery.
5. What makes it so valuable?
This question is specifically about bitcoin. There’s an interesting paradox that as bitcoin becomes more valuable….bitcoin becomes more valuable. With its increasing value it gains acceptance particularly with wealthy individuals as well as large companies. This in turn leads to more demand.
Scarcity: There is a finite amount of Bitcoin that can be created through bitcoin mining. Apparently we are at 19 Million bitcoins and only 21 million can be produced. The amount is determined by an algorithm made by its founders. This also creates value especially as previously mentioned our governments spend and print money reducing the value of fiat or government money.
Bitcoin did gain early acceptance with drug smugglers, tax dodgers and the like. But it has slowly gained mainstream acceptance much to the chagrin of central banks,
Another appealing aspect of cryptocurrencies is that their value has low correlation to stock market movement which helps diversification.
6. Who regulates cryptocurrency?
Currently there is no regulation on cryptocurrencies which is part of the risk and appeal. The US was the first to try and regulate trading in cryptocurrencies by calling bitcoin a commodity. This allowed the commodity and futures regulator to oversee trading platforms that trade in digital currencies within the confines of the United States. It also allowed futures to trade on bitcoins which further adds to credibility. Other government regulators are trying to figure out how they can regulate and also dissuade ownership but I think the cat is out of the bag.
7. What are the risks of ownership?
Digital currencies prices are very volatile with large daily price swings. There is little oversight and manipulation by large holders is possible. There is additional risk in the storage of bitcoin. You may have read that many people have forgotten their passwords to their bitcoin accounts. There is no bank vault or manager to help you here.
Interestingly there is now a digital bank in the US that will help store bitcoins for Americans. There is additional risk in the rise of AI and supercomputers that may be able to infiltrate and change block chain data but so far this is just conjecture. There is of course risk that your crypto account could be hacked.
Another often not discussed risk is the cost to store digital data. The number of servers and computers and electricity needed for these digital currencies is staggering. Most of the mining is done in China where electricity is subsidized. Quebec was a leader in bitcoin mining for the same reason and we can’t even contemplate it in Ontario due to high energy costs.
8. How do you purchase cryptocurrency?
You can purchase cryptocurrencies in several ways. Directly through a platform that trades digital currencies. There are also funds in the US and Canada that hold Bitcoin, ethereum and baskets of digital currencies.
Again these are going mainstream as providers like paypal and square, two payment systems, look to get into the mix.
9. Where can you keep/store cryptocurrencies?
If you buy a fund that holds digital currencies, the fund can be held in an account that is administered by an Advisor like us. If you buy digital currencies directly you can hold them in an online account. There is also a digital wallet which allows you to download your cryptocurrencies into a device that can be removed from a network and is unhackable.
As mentioned above there is a bank that was formed to only hold digital currencies. But the major US banks are also moving towards accepting and storing digital currencies for Americans. Canadian banks are followers not leaders and will wait until someone else does the ground work. JP Morgan and Goldman Sachs are looking to soon accept bitcoin deposits.
10. Are cryptocurrencies secure?
This question may be beyond my technical knowledge, but the answer is somewhat. To the extent that you hold them directly then they are as secure as your password and general security protocols on your computer. We prefer to hold them via a fund that has security protocols in place.
11. Does the federal government track cryptocurrencies?
The Canadian government has begun to try and track cryptocurrencies. As more money is moved in this direction and more gains are made their interest in getting their hands on this money and taxing any income has obviously increased. Many transactions are on platforms that go beyond our borders and other than large currency deposits it is hard for the money to be tracked. When done on a stock market the gains of course are easily tracked.
12. What is the difference among the various cryptocurrencies?
Bitcoin is essentially a digital currency created to disrupt money to some extent. So bitcoin has become an alternative to gold for example. It has first mover advantage and is largest and most accepted for of digital currencies.
Ethereum a competing digital currency was created to be an infrastructure for development of blockchain technologies and uses. So ehtereum for example can be used as a platform for transactions such as mortgages, securities trades etc. Ethereum can be compared to infrastructure. Ethereum is earned by data miners who mine and store transactional data for ethereum applications. Ethereum is part of the goal to disrupt finance and decentralize transactions.
There others such as XRP, Litecoin, bitcoin cash etc.
13. Is cryptocurrency an asset class?
I, we, believe that digital currencies are indeed an asset class much like gold or currencies. I think people need to draw their own conclusions here as the decision to venture into any asset class is not without risk. That said it is worth considering when an asset class has low correlation to the stock market. Low correlation doesn’t mean low risk…it just means that digital currency prices will march to their own drum beat…up and down.
Should it be in everyone’s portfolio?
This is a very difficult question to answer. As your wealth increases assets such as gold, silver, alternative assets should definitely be considered as part of your asset mix. I would therefore throw digital currencies into that mix. One thing that is adding to Bitcoins rise is that wealthy money that is run from so called family offices are indeed beginning to store some of their wealth in bitcoin. This alone adds to its viability. Tesla was an early adopter but we may also begin to see large companies begin to hold
Bear in mind that these holdings such as gold or bitcoin don’t generate income but are meant to diversify away from the volatility created by the stock market. For example if the USD were to crash through reckless government spending….well then we could very well have to resort to gold or a viable digital currency again.
Me personally I get worried when I hear the current Trudeau administration mention further government spending during the current pandemic. I personally have a very small position in a bitcoin fund and regret not putting more there as I’ve been following bitcoin for the better part of a decade.
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