Is bitcoin a good investment? A guide for Canadian investors

Bitcoin is arguably the most polarizing investment asset today. It has skeptics such as central banks and the larger global financial system in one camp, and high-profile cheerleaders including such tycoons as Elon Musk, Jack Dorsey and Mark Cuban in the other. Recently, some skeptics and fence-sitters—particularly the large U.S. financial institutions and payment processors—appear to be caving, with many jumping on the bitcoin bandwagon with various crypto considerations.

Even bitcoin’s recent swoon—cratering 50% from the year’s above-$64,000 high in April 2021—couldn’t dampen crypto enthusiasts’ optimism. Others are getting more curious about the crypto show. Here’s what you need to know before jumping in.

What is bitcoin?

For those who tuned in late, bitcoin is a type of digital currency that exists only online and operates using peer-to-peer technology. It was launched in 2009 by an unknown person (or persons) using the pseudonym Satoshi Nakamoto. Bitcoin can be used both as a form of payment and an investment, much like government-issued fiat currencies (what we call “money”). However, virtual currencies like bitcoin have no paper version, central control or government authority regulating their supply.

Transactions can be made anonymously, a feature that eliminates the middleman and keeps transactions hidden from legal scrutiny. This makes bitcoin particularly appealing to libertarians, tech enthusiasts, speculators and, well, those living on the wrong side of the law. Cryptocurrencies like bitcoin are also known to have served some rather unconventional purposes.

Blockchain: the brains behind bitcoin

Blockchain is the underlying technology on which bitcoin and other digital currencies operate. Simply put, a blockchain is a database or a digital accounting ledger. As a decentralized, peer-to-peer network, blockchain records information about every bitcoin transaction that takes place anywhere in the world and distributes it across the entire network of computer systems.

These attributes allow users to send money anywhere in the world without an intermediary to convert the currency, or having to pay conversion fees or transaction costs.

Once a transaction is recorded on blockchain, its decentralized nature and cryptographic algorithm make it virtually impossible to tamper with it. 

Is bitcoin a good investment in 2021?

In terms of absolute numbers, bitcoin’s dominance is undeniable. As king of crypto, it clocked a staggering 300% gains over a one-year period, handily topping the 31% gains for the S&P 500 and 40% for the S&P/TSX Composite Index, for the same time frame, as of June 9, 2021.

This is after bitcoin’s steep plunge in April 2021 from its all-time high price of more than US$64,000, wiping out nearly half of its market cap.

As with any other speculative investment, your losses and gains could be magnified by investing in bitcoin, says Tina Tehranchian, senior wealth advisor at Assante Capital Management Ltd.

“At this stage of the game, it is a very high-risk investment that should only be attempted by those who have the stomach for the price volatility and can afford to lose their bitcoin investment,” she says.

One way to smooth out bitcoin’s volatility is to buy right and sit tight, notes Gaby Hui, director at Merkle Science, a predictive blockchain monitoring and investigative platform that helps crypto companies, financial institutions, and government entities prevent illegal activities using cryptocurrency.

“Purely by looking at crypto versus equities performance over the last few years, it [bitcoin] is worth the risk,” she says, but with the caveat that investors should keep an eye on a longer horizon and not be startled by bitcoin’s fluctuations.

Another argument in bitcoin’s support points to “studies that have shown that bitcoin is weakly correlated to equities and that by adding exposure to it, you can create a more efficient portfolio,” Hui says.

Fears of rising inflation have also provided fuel to bitcoin’s appeal. In fact, investors with some risk appetite are already buying bitcoin in place of gold, a safe-haven asset held to protect against inflation. “Gold has been used for decades as a hedge against inflation, the way investors are using bitcoin today,” Hui observes.

It is important to understand that bitcoin’s supply—unlike fiat currencies like the U.S. or Canadian dollar— is limited; it cannot be produced ad infinitum. “This was built into bitcoin’s code,” says Hui.

Only 21 million Bitcoin units can ever be produced and with institutional investors starting to pile into it, demand will increase, driving up its price, Hui notes.

As for bitcoin’s suitability for retail investors, Tehranchian’s approach is more deliberative than dismissive. “There is no clear right or wrong answer,” she says, adding “whether investing in bitcoin is right for you or not really depends on your tolerance for risk, the composition of your current investments, and your time horizon.”

RBC Capital Markets analyst Mitch Steves says in a research note the crypto space in general has the potential for enormous growth. He sees the bitcoin market growing tenfold to US$10 trillion over the next 15 years, a third of it coming at the expense of gold.

That said, the pace at which the crypto market is evolving makes any prediction perilous. For that reason, the usual investment riders apply (past performance does not guarantee future results).

Is bitcoin safe?

The rise of bitcoin has caught the attention of investors looking for new growth frontiers. But is Bitcoin a safe bet given its history of volatility and recent headwinds resulting from Elon Musk blasting its energy profile and China upping regulatory rhetoric?

There are many known risks associated with bitcoin that investors should heed. “Central bank policies, policies in individual countries and companies, could have a big impact on price movements for cryptocurrencies,” says Tehranchian.

Then there are technological tripwires. Past events have exposed security holes— from hacks and heists, to the loss of private keys and transfer errors—that can ratchet up bitcoin risks and short-circuit its price upswings.

Still, Hui assures bitcoin is inherently safe, noting, “it’s the exchanges on which bitcoin is traded that are fallible.” It is best to leave only the crypto you intend to trade on the platform you choose, she advises. Move the portion you intend to buy and hold into an offline hardware wallet (or “cold wallet” in crypto parlance, such as Ledger, Trezor, or CoolWallet).

Another way to neutralize cybersecurity risk is to “invest in bitcoin through a mutual fund, [which] would be safer, as your digital wallet would be safely guarded by the fund company,” Tehranchian believes.

Where to buy bitcoin

As bitcoin’s popularity soars, so do the number of ways Canadians can access it.

There are several homegrown crypto trading platforms—Newton, Wealthsimple, NDAX, Bitbuy, Shakepay and CoinSmart* among others—where investors can directly buy crypto with Canadian dollars.

There are some non-Canadian trading platforms—Crypto.com, Binance and Kraken—that allow investors to buy and keep crypto in Canadian dollars.

For the more passive investors, a bitcoin mutual fund or ETF may be the way to go. While investors won’t hold bitcoin directly, these funds are seen as a less risky way to gain crypto exposure. “You can invest small amounts this way and, even though you will have to pay the management expense ratio, it is well worth it for having the peace of mind that you would never lose the key to your digital wallet,” Tehranchian says.

Canadians put a whopping $1.3 billion into crypto asset ETFs in April, more than doubling the category’s total inflows to $2.5 billion.

It is now also possible to buy bitcoin at bitcoin ATMs, or BTMs, that have popped up all over Canada. Similar to a cash point, a BTM is a kiosk that allows you to purchase bitcoin by using cash or a debit card. There are more than a thousand bitcoin ATMs in Canada.

There may be multiple paths to bitcoin ownership, but one thing remains constant: the fundamentals of investing. (Here’s an excellent MoneySense primer on how and where to buy bitcoin in Canada, if you want to dig deeper.) No matter why you are buying bitcoin or how much, it is important to understand risks, know your limit and play within it.

Read more on crypto:

• How to buy bitcoin in Canada (and find out where, too)
• How to buy Avalanche (AVAX) in Canada
• How to buy Solana (SOL) in Canada
• Altcoins vs. bitcoin: What to consider while building your crypto portfolio
• Trading tools that can raise your crypto game