Industry / Market Commentary

Should I Put A Bit of Coin into Bitcoin?

  • Kevan Matheson

    Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion. After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency. In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems. Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more. Follow Small Cap Kev & his team on Instagram, TikTok, YouTube & this newsletter. If you like this content, please share it with your friends!

    View all posts

There are valid reasons for many consider to traditional banking a heavily outdated system… but is Crypto the answer?

Although retail investments into the equities market have been rising at an eye-watering pace since 2020, few assets seem to be infiltrating the mainstream investment world as much as Cryptocurrency.

Trading over US$28,850,000,000 in volume daily, Crypto seems to have dominated the headlines within the market world. With institutional exposure at an all-time-high, many banking institutions, Bitcoin trusts, funds, and even companies (ahem, Tesla) are constantly buying up billions of dollars with of Bitcoin to add to their portfolios.

What is the reason? Are people rallying into Bitcoin because its decentralized benefits make it the most ideal medium of exchange? Or is it simply a speculative digital asset that institutions and individual investors alike can take advantage?

We’re going to take a look into what’s going on. 

Why was Bitcoin created?

First, we have to start with a bit of a history lesson about the formation of fiat currency itselfIn case you aren’t aware, a fiat currency simply refers to a medium of exchange that has no intrinsic valueA $10 bill means nothing if the receiving party doesn’t accept its worth; therefore, the bill has no intrinsic value, it has implied value. 

If this seems confusing, conjure up the mental image of people burning Bolivar (the national currency) in Venezuela to stay warm, after its value plummeted due to hyperinflation. The bills became more valuable as fuel than anything else, as they were essentially reduced to paper. 

Dollars, rupees, shekels; all were created by governments to help the facilitation of business within their nations. If you’re giving someone goods or services without a currency in place, you’ll either need to receive something of value back or inherently trust the person you’re dealing with. In order for economies to evolve to systems larger than friends & family, they needed to have a mutually-agreed upon store of value... thus, fiat currency was born. 

Bitcoin was created with the desire to take this a step further and establish a truly “trustless” cash system, meaning that you didn’t have to rely on blind trust of institutions or governments, eitherWe are currently expected to trust central banks not to debase our currency, yet many breaches of that trust occur frequently. The federal reserve prints money anytime it wants/needs, constantly de-valuing the American dollar, whereas Bitcoin only has a finite number of units in existence, with a maximum amount that can ever possibly be created. 

We trust banks to hold our money electronically, yet they lend it out relentlessly, keeping only a fraction of it in reserve and earning interest on the rest, while paying us a mere fraction of a percentage in certain savings accounts. PS: if you’re not investing and keeping your money parked in a savings account, you’re likely losing money every year! 

Another initial qualm that many have with banks is the third-party intermediaries that are, for some reason, required to make digital monetary transfers. These third-parties will often charge you a flat fee, rather than an appropriate percentage of the transaction, making smaller transactions rather costly. 

Why are these fees charged? Other than monetary gain, there‘s a lot of overhead involved with traditional banking, such as: 

  • Backoffice expenses, such as reconciling transactional data 
  • Security measures, which incur costs related to the risk of security breaches in any centralized database 
  • Costs associated with fraudulent activity, as money must be refunded in the case of fraud 

There are valid reasons for many consider to traditional banking a heavily outdated systembut is Crypto the answer? 

Alternate Payment System, Or Speculative Digital Asset? 

It is interesting how something created with an intention can stray far away from that, and rapidly scale at the same time. It’s not always a bad thing. Jeff Bezos originally started Amazon as a way to sell books around the world from his garage. Many of his colleagues and friends declined the chance to invest in him at that stage. Pivots and reiterations are necessary to grow an idea; however, sometimes you become the very thing you set out to change.

With Bitcoin, there’s no doubt that it has become a highly speculative asset. As the popularity of digital currency rises, many people are pouring their capital into cryptocurrencies. With the amount that Bitcoin has appreciated over the last decade – once being worth pennies, now reaching upwards of $60k CAD for a single coin – it has become a rapid return-earning asset for many skilled speculative traders. Its current volatility would make anyone quiver about the thought of using it as a medium of exchange, as 5% changes can happen in minutesDespite its mass surges and pullbacks, it has been on an overall uptrend since its inception.

There’s no question that BTC is re-establishing itself as a vehicle for wealth. However, should the world decide to adapt this pioneering crypto currency, one might imagine there would have to be a heavy halt on its erratic price movements, putting it closer in comparison to other foreign exchange investments. For tech-savvy investors and speculators alike, Bitcoins behavior is nothing short of thrilling. However, that excitement may eventually be replaced with the pleasure of being free of a centralized, third-party dominated banking system, should Bitcoin take its reign as a medium of exchange globally. 

Could Bitcoin be going through one massive honeymoon phase before it becomes a “blue-chip” currency? Only time will tell. The future of Bitcoin and its aim to become the world’s de-centralized monetary system remains widely unknown

Bitcoin Has the Remarkable Capability of Remaining Unfazed Through Economic Turmoil (in Theory) 

One thing we do know though, is that due to its decentralization from governments, Bitcoin can offer a certain kind of protection. Unlike Bitcoin, the U.S. dollar seems to have an infinite supply. The Federal Reserve has been printing mountains of paper money this last century, by literally buying U.S. Treasury Bonds out of thin air. While this seems like a super convenient way to never run out of money, unfortunately it is detrimental to the value of the money. 

Mass inflation occurs when there is too much money in circulation. The government aims to keep inflation at bay, which normally equates to 1-3% a year. $1 in 1913, when the Fed was created, is now worth a mere $0.0387 today. This means if you had $1 million in 1913, your money, adjusted for inflation, would be worth a mere $38,700 right now.  

Because Bitcoin has a hard cap on the number of coins that can ever be produced, you won’t see that steady level of value depreciate like you do with the U.S. dollar.  

Now, were not saying that Bitcoin is an ideal hedge against general market volatility, or economic troughs/recessions, as Bitcoin is not directly corelated to stocks, real estate, commodities, bonds, or other currencies. Not to mention it is still volatile in its own right. However, should our dollar become worthless and we see a devastating economic depression like the one in the 1930’s, Bitcoin would (in theory) hold its value, and become a safer place to hold your money than banks, which would, at that point, have trouble liquidating and likely not be able to grant you access to your own funds.  

Keep in mind, in Canada, the CDIC covers up to $100,000 should your bank become insolvent, while the CIPF (Canadian Investor Protection Fund) covers up to $1,000,000 should your MFDA (Mutual Fund Dealers Association) or IIROC brokerage become insolvent. While this is great in theory, as one can imagine the devastation to an individual who had spent years building a multimillion-dollardiversified portfolio with a brokerage house; however, this assumes that these organizations can uphold their end of the bargain in the face of crisis. Should the victims of the 1930’s Depression have had holdings in crypto, they wouldn’t face the problem of banks being unable to distribute their own funds!  While one may notice a slight correlation to the market’s benchmarks and Bitcoin as of recent, that is theorized to be due to the immense buying of Bitcoin from several mass institutions. This is believed to be a short-term event and is not yet indicative of the correlative behavior between Bitcoin and other assets.  

Theory is great, but we’d be remiss to not consider the effect that irrationality has on the economics of crypto. In the preceding explanation, investor psychology isn’t factored into the theoretical path of cryptocurrencies. If a market craters and investments lose massive amounts of their worth, investors may start selling their cryptocurrencies to get more cash on hand. This would create a correlation between overall market outlook and the price of mainstream crypto; however, this is a symptom of humanity, rather than of crypto.

Like any other speculative asset, be sure to invest wisely, be patient with your entry, (no FOMO buying!) and do as much research as you can. The most important precaution however, when dabbling in Bitcoin – 

Keep push notifications turned on for Elon Musk’s tweets.[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

  • Kevan Matheson

    Prior to starting Edge, Kevan was an Institutional Analyst at RBC Global Asset Management, one of North America’s largest fund managers, with assets under management in excess of $400 billion. After spending the majority of his career focused on large market capitalization public companies, Kevan became attracted to the risk/reward proposition of growth stocks and cryptocurrency. In 2017 Kevan published a book on investing in cryptocurrency, where he speculated on the coming growth in NFT’s and the underlying tokens that power their ecosystems. Known in the growth stock community as Small Cap Kev, his current passion is finding stocks in disruptive industries like blockchain, psychedelic medicine, plant-based meat alternatives & much more. Follow Small Cap Kev & his team on Instagram, TikTok, YouTube & this newsletter. If you like this content, please share it with your friends!

    View all posts

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