Investing in cryptocurrency is best done when you understand how the asset works, experts say, including its technical underpinnings and its turbulent history.GETTY IMAGES
Cryptocurrency is barely 15 years old, and it’s already made – and lost – many fortunes. Should you invest in it, and if so, how?
Here’s a guide to what it is, and whether or not to include it in your investment portfolio.
Originally launched as Bitcoin in 2009, cryptocurrency has since flourished into a wide range of assets, spawning digital “coins” from Ether to Dogecoin. It’s a digital asset traded on a blockchain, which is a distributed digital ledger that no single organization controls. Instead, many people have copies of it.
Different blockchains use their own algorithms to ensure everyone’s copies are in sync and to prevent fraud.
Experts prefer the term “crypto asset” or just plain “crypto” these days. Many of the digital tokens don’t really meet the traditional definition of money, argues Jeremy Clark, associate professor at the Concordia Institute for Information Systems Engineering at Concordia University in Montreal.
“Some people actually see Bitcoin more like gold, where it’s not meant to be a stable store of value,” he says. “It’s meant to actually go up in price and be deflationary.”
Another type of crypto asset, called “stablecoins,” is pegged to fiat currency and used as a fast digital payment mechanism rather than as a speculative investment vehicle.
Crypto’s tendency to appreciate over time attracts investors to buy-and-hold strategies. Bitcoin began with no financial value but it is now trading at more than US$100,000. (It hit a record US$126,272 in early October.) Early investors made millions, yet the asset has also seen many significant downturns.
In other words, this isn’t an investment instrument for the faint-hearted.
Extremely high-risk assets carry the possibility of complete loss, says Julian Klymochko, CEO of alternative exchange-traded fund (ETF) provider Accelerate Financial Technologies Inc., in Calgary.
“I think people should not lose sight of that. There’s nothing fundamentally backing crypto,” he adds, noting the asset class has not had the same track record as bonds, equities, or precious metals.
How to invest
If you do want to invest in crypto, you have two broad options: hold your own assets (self-custody) or have others do it for you.
Self-custody involves buying cryptocurrency, either through an exchange or even a specialized ATM. You don’t get actual coins. Holdings are stored digitally on the blockchain. You access them with a crypto address, which can be printed on paper or stored in a cryptocurrency wallet. The latter can be a program running on your computer or on a phone. Or it can be a small device dedicated to storing the digital code that represents your investment.
Self-custody is risky unless you know what you’re doing. Lose your crypto address and you might lose your investment forever. You don’t want to end up like UK-based IT engineer Jamie Howells, who in 2013 accidentally threw out a hard drive containing the addresses for 8,000 bitcoins, now worth more than $1.2-billion. He was last seen suing his local council for the right to sift through his local landfill in search of the device.
A safer option might be to buy crypto through an exchange and to leave it in your account, but this isn’t without risk either. The crypto industry has seen numerous exchange shutdowns, including Canada’s QuadrigaCX and the Bahamas-based FTX. Customers of downed exchanges often lose their holdings.
Unless you’re prone to keeping your digital cash under the bed, an ETF is usually a safer bet.
“For a first purchase, boring is good,” says Nicholas Mersch, a portfolio manager at Purpose Investments in Toronto, which was the first to gain approval to operate a bitcoin ETF.
“In Canada, the safest path is to open an account at a Canadian brokerage you already know and that is on [the Canadian Investment Regulatory Organization’s] radar,” he says.
Then he suggests funding it the usual way, such as with Interac, or through a bill payment or bank transfer. From there, he says, a Canadian issuer can sell you a spot crypto ETF.
Stick to big coins
Bitcoin is the original crypto, but it isn’t the only one. There are hundreds, many of which are known as “altcoins” or “memecoins,” often launched as vanity coins by influencers. Many promise meteoric returns but they often fail to deliver and they sometimes even crater in value.
“The short and simple answer is to just stick to the big crypto assets,” says Jake Moodie, an analyst in the digital asset group at Ninepoint Partners in Toronto.
Institutional interest in crypto has spiked, as illustrated by crypto ETFs and digital asset treasury companies that hold crypto reserves. That has buoyed the performance of large-cap crypto assets, he explains.
“The five largest crypto assets – Bitcoin, Ethereum, BNB, XRP, and Solana – make up 90 per cent of the total crypto market value,” Mr. Moodie says, suggesting that investors stick to these.
Don’t stake more than you can lose
Get-rich-quick advice from digital dilettantes and crypto-charlatans is free. Failed investments are not. Given that even the biggest crypto assets are speculative, you should only invest what you can afford to lose, warn experts.
“For size, I like to frame it as a sleeve inside a broader portfolio,” Mr. Mersch says. “For most beginners, 1 (per cent) to 5 per cent of investable assets in crypto is enough to participate in the upside without blowing up their financial plan if we get a 40-per-cent drawdown.”
He advises investing in longer-term cycles, given the asset’s short-term volatility. Dollar-cost averaging, which means investing a set amount on a schedule such as monthly, is also usually better than trying to time the market, perhaps even more so with extremely volatile crypto assets.
Investing in cryptocurrency is best done when you understand how the asset works, experts say, including its technical underpinnings – such as the blockchain – and its turbulent history.
Many may dabble, but potential disaster awaits those who mortgage their houses to go all-in, or who stake their retirement on it. While it can represent a small, high-risk part of a portfolio, it pays to take a more holistic view of this strange animal within a far bigger, more stable portfolio.