Should I invest in cryptocurrency?
By Bennett Cheung 25 October 2018 3 min read
This article was written in 2018. Some of the information may be out-of-date.
Cryptocurrencies have become the talk of the town, especially with the recent rise and fall in Bitcoin. At its peak in January 2018, Bitcoin had hit $19,000 US per coin—up from $1,00 a year prior. But like most juicy stories, cryptocurrencies have a little bit of truth and a lot of hype behind them.
What is cryptocurrency?
Janek Guminski, ATB Director of Foreign Exchange, said the craze for cryptocurrencies like Bitcoin, Ethereum or Ripple is all driven by speculation. “Cryptocurrencies, in and of themselves, have no intrinsic value. They only have the value that the market will assign to them because they’re not backed by something like gold or the taxing power of a government.”
Yet Bitcoin and other cryptocurrencies—there are more than 1,300 in existence—are gaining in use and acceptance, he notes. For example, currently more than 100,000 merchants around the world accept Bitcoin to sell everything from coffee to yachts.
But what is Bitcoin exactly?
This cryptocurrency surfaced in 2008 as software authored by a mystery person or group of people under the name Satoshi Nakamoto. As an online token of exchange, it’s independent of any bank or government. “Bitcoin can be exchanged for goods and services and reduces the friction between buyers and sellers; however, it has no central banking authority and provides no interest yield,” explains Guminski.
How does it work?
Bitcoin, like other cryptocurrencies, works through blockchain technology—an online, public ledger that records digital transactions for all to see. It’s not tied to any country (although it’s valued against the US dollar), exists only online and only has the value its users agree that it has.
The volatility of cryptocurrency
ATB’s Financial Markets group believes cryptocurrencies and blockchain technology have the potential to change how businesses operate in the future, but choosing a winning “coin” now is likely inadvisable at best and possibly moot at worst. “Which cryptocurrency is here in five years, and how pervasive it is in the economy, is yet to be determined,” says Rob Laird, head of ATB Financial Markets. “We anticipate central banks will develop their own cryptocurrencies, adding legitimacy and confidence to the market.”
“I don’t dispute that there will be a market for cryptocurrencies,” he adds. “The issue lies in their volatility; they’re strictly market driven and not supported by central bank policy as traditional currencies are.” Bitcoin is proof that this concern is real and valid; it dropped in value from $19,000 in January 2018 to under $6,000 on February 6, 2018.
What is required to invest in cryptocurrency?
“To hold a cryptocurrency, you have to open a ‘digital wallet’ and go through online marketplaces or digital currency exchanges or brokers,” says Janek. “Funding your digital wallet is met with high fees ranging between one and a half to ten percent.”
Janek cautions people against seeing cryptocurrencies as an investment because of the highly speculative nature of the digital tokens and the accompanying risk. When new trading opportunities started opening up for Bitcoin—for example, the Chicago Mercantile Exchange started trading Bitcoin futures in December 2017—speculators rushed in to bet on its rise or fall.
Controversy and opportunity
Governments are paying closer attention to cryptocurrencies. Some are seeking regulation around them, while others are considering a ban on the disruptive digital tokens.
Though none of ATB’s foreign exchange specialists, Janek included, own any cryptocurrency, they continue to watch the market closely as it develops. “The value of cryptocurrencies in the near term is more likely to be determined by market sentiment than fundamental value,” he concludes. “As such, there might be an opportunity for trading with, or against, the psychology of the market.”
Institutional investors have joined in to investigate the opportunities; Ontario pension giant OMERS announced January 29, 2018 it was creating an Ethereum-focused public company but was quick to say it was focusing on “the underlying crypto assets, not the cryptocurrency per se.” The blockchain technology behind cryptocurrencies may be the real story for market professionals and investors if they look beyond all the hype.