Should You Invest in Cryptocurrencies?
Feb 22, 2022
Can you name three things you can pay for with cryptocurrency in Canada? If you’re like most Canadians, you’re probably struggling for an answer, and this illustrates what makes cryptocurrency so unusual. Without fulfilling its purpose as a viable currency, it has become a worldwide investment phenomenon.
If you want to know three things cryptocurrency can pay for, here are some examples. You can use Bitcoin to pay for a bed or mattress at a store in Winnipeg, to buy a car from a Quebec dealership or pay property tax in Ontario.
How we got here
It all began in 2008 when Satoshi Nakamoto shared a document that introduced the concept of Bitcoin to the world. While the document went into detail, it included one sentence that clearly summed up the operation: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” Interestingly, Satoshi Nakamoto may or may not exist and is widely suspected to be a pseudonym for one or more inventors.
The technology behind Bitcoin, known as blockchain, is largely open source. This made it easier for inspired software developers and entrepreneurs to launch their own cryptocurrencies. Today, there are thousands of cryptocurrencies in the market, referred to as altcoins – the term for any cryptocurrency that’s not Bitcoin.
Rated by market capitalization, Bitcoin is the world’s largest cryptocurrency. The second is Ethereum. Other popular altcoins include Cardano Dogecoin, Binance Coin, Tether and Ripple. The top 10 account for the majority of global cryptocurrency assets.
Risks and opportunities
Let’s say that an investor bought $10,000 worth of Bitcoin on January 1, 2020. By the end of the year, their investment would’ve been worth over $30,000. Now, let’s say another investor purchased $10,000 of Bitcoin in mid-April of 2021. Three months later, their investment would’ve been worth about $5,000. It’s evident here that the story of cryptocurrency performance has been a wild ride.
So, is cryptocurrency for investors or speculators? The simple answer is that it may be purchased by both parties. Many speculators aim to take advantage of the extreme volatility through buying the dips and taking profits after a rebound – an aggressive market-timing approach. A speculator could also take a chance on a lesser-known cryptocurrency with the hope that it skyrockets or becomes mainstream. Some more traditional investors, perhaps saving for retirement, may choose cryptocurrency to buy and hold if they believe in its long-term growth potential. In this case, cryptocurrency would represent only a small percentage of their portfolio, and they would need the risk tolerance to withstand volatility that has been extreme in the past. It’s not an asset class for every investor.
Anyone who does decide to acquire cryptocurrency has a few choices for buying or investing. In Canada, a variety of cryptocurrencies can be bought directly through an online cryptocurrency exchange or trading platform. To purchase Bitcoin, there’s also the option to use a Bitcoin ATM. Another avenue is to invest through a cryptocurrency mutual fund or exchange-traded fund.
It’s important to ensure that choosing this asset class suits an investor’s financial objective and risk tolerance – and isn’t only a reaction to a fear of missing out. Get in touch if you would like to learn more about cryptocurrency as a potential investment.