Like every CEO when the pandemic hit, Christopher Gimmer wondered how the crisis would affect his Ottawa-based startup, Snappa. He had reason to be hopeful, on the business front at least. Snappa is a small company with only a handful of employees, its simple-to-use online graphic design tools were already popular with entrepreneurs, and within weeks Snappa’s growth rate accelerated as more businesses rushed online. Yet Gimmer was troubled by what he saw around him— governments battling the rapidly spreading COVID-19 virus by raising debt to levels not seen since the Second World War, while central banks slashed interest rates to near zero.
Which is when Gimmer did something very few other CEOs had ever dreamed of. After Snappa’s bank cut the interest rate on its “high-interest savings account” to 0.45%, Gimmer began to shift a portion of Snappa’s cash holdings into bitcoin (BTC), the radical cryptocurrency that promises a way to conduct transactions online while sidestepping the established world of finance. It’s also an asset JPMorgan Chase & Co.’s chief executive officer, Jamie Dimon, once derided as a “fraud … worse than tulip bulbs.”
“Central banks and nation states have reached a point of no return, and they’ll never be able to raise rates again,” says Gimmer, who fears the value of currencies will be driven down even further after the pandemic ends. Bitcoin, on the other hand, has a hard cap of 21 million units, and the last bitcoin won’t be electronically mined until the year 2140, something fervent adherents, including Gimmer, insist protects its value against erosion. “We worked really hard on this business over the course of five years and developed a really nice cash balance. We realized bitcoin could be the ultimate reserve asset for us to protect our purchasing power,” he says.
For most of bitcoin’s history since its conception in 2008, when someone named Satoshi Nakamoto uploaded plans for a decentralized and highly secure online currency, it had largely been the domain of digital utopians and speculators. To the extent that banks and other corporations considered it at all, it was mostly as a black hole rife with fraud, money laundering and prone to extreme volatility. In short, something that could easily be dismissed as a peculiar but passing fad. That changed somewhat after bitcoin prices first went parabolic in 2017. The bitcoin boom minted thousands of crypto millionaires, and Wall Street banks found themselves suddenly able to look past bitcoin’s scandals to muse about opening potentially lucrative bitcoin trading operations. But with the 85% collapse in bitcoin’s value the following year, many of those endeavours fizzled.
The past few months, however, have seen the barriers between the worlds of fringe and traditional finance crumble in far more practical and potentially lasting ways. Against the backdrop of a renewed surge in bitcoin that saw its price rise tenfold since March 2020 to around US$50,000 per coin (as of early March), a spate of new bitcoin-based exchange-traded funds began trading on the Toronto Stock Exchange, touting themselves as crypto investment vehicles for the masses. Big global banks are once again embracing cryptocurrencies. At the same time, central banks around the world are actively working on digital currencies of their own, with the Bank of Canada at the forefront of that effort.
Then there’s the matter of that technology multibillionaire who thought some bitcoin on the balance sheet was a good idea. In early February, Tesla founder and CEO Elon Musk revealed the electric carmaker had bought US$1.5 billion in bitcoin and would start to accept it as payment for its vehicles. The part-time rocket builder’s decision added rocket fuel to bitcoin’s already stratospheric price. But Musk also ignited a wider debate about whether cryptocurrencies have a place in corporate treasuries.
“Everyone is crazy not to have a 1% to 2% position in bitcoin—if it goes to where some of us think it’s going,” says Gimmer.
And where’s that? If bitcoin displaces gold as the inflation-anxious investor’s alternative of choice, then the price could hit US$500,000, Gimmer says without any hesitation. If it devours the bond market, as he thinks it will, US$1 million each. “But I won’t give you the really bullish case because then people just think you’re crazy,” he adds.
Such talk makes Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, roll his eyes. He counts himself among those fascinated by digital currencies and their promise to revolutionize the financial world’s antiquated and sluggish payment systems. Still, he questions not just bitcoin’s sky-high price, but also its appropriateness as an investment for both individuals and companies. “Maybe some companies will want to start putting bitcoin on their balance sheets, but the volatile nature of most cryptocurrencies means they’re not suitable for the majority of businesses,” he says. “There’s a reason we don’t price things in baseball cards and Beanie Babies.”
Whether bitcoin is “the mother of all bubbles,” as one Bank of America Securities analyst recently described it, or the future “currency of choice for international trade,” as another analyst at Citi put it, one thing is clear amid the mania: Bitcoin has reached a tipping point.
Signs that bitcoin is having a mainstream moment abound. Over the past year, a number of high-profile investors revealed themselves to be bitcoin converts. Billionaire hedge fund manager Paul Tudor Jones announced he’d put just over 1% of his assets into bitcoin, while fellow American billionaire investor Stanley Druckenmiller revealed his own stake. “It’s been around for 13 years, and with each passing day it picks up more of its stabilization as a brand,” he told CNBC last fall.
Bitcoin’s shedding of its crypto-anarchist roots can also be measured in the change in tone among several major banks. Dimon, JPMorgan Chase’s CEO, has walked back some of his harsher criticism of the cryptocurrency as the bank has warmed to the sector. Last year it accepted two of the largest bitcoin exchanges, Coinbase and Gemini Trust, as clients. Using the same blockchain technology that underpins bitcoin, the bank also launched its own digital coin, JPM Coin, to handle some client payments around the world.
Other institutions have gone further. In February, America’s oldest bank, Bank of New York Mellon, said it would begin to hold, transfer and issue bitcoin on behalf of its clients. Counterpoint Global, a unit of Morgan Stanley Investment Management that oversees US$150 billion in assets, is reportedly considering whether bitcoin would be a suitable fit for its investors. Mastercard is set to begin supporting select cryptocurrencies on its payment network later this year. Meanwhile, BlackRock, the world’s largest asset manager, has “started to dabble” in bitcoin by letting two of its funds invest in bitcoin futures, according to managing director Rick Rieder.
Bitcoin appears more normal at a time when everything else about the financial world seems so abnormal. Unprecedented stimulus efforts by governments and central banks have begun to spark growing fears of inflation, even if official measures of consumer prices have remained weak. But whereas gold bugs would have fled to the shiny metal in economic turmoil past, today we’re seeing bitcoin bugs. “Bitcoin at this stage is best thought of as digital gold yet has many advantages over the yellow metal,” prominent value investor Bill Miller wrote to clients in January. Highlighting other companies that have moved some of their cash to bitcoin, including Square, MassMutual and MicroStrategy, he wrote, “If inflation picks up, or even if it doesn’t, and more companies decide to diversify some small portion of their cash balances into bitcoin instead of cash, then the current relative trickle into bitcoin would become a torrent.”
A lot of investors, economists and business leaders are worried about inflation. Yet it’s not been proven that bitcoin does any of the things crypto-enthusiasts insist it does—serve as a store of value or a medium of exchange. “Bitcoin is supposed to be digital money, but it’s not really good at that,” says Andreas Park, associate professor of finance at the University of Toronto’s Rotman School of Management. If you believe a bitcoin could be worth $500,000 or $1 million in the decades to come, you would be foolish to ever spend it.
The first documented commercial transaction paid for with bitcoin was when Laszlo Hanyecz bought a Domino’s pizza in 2010 for 10,000 bitcoin when the cryptocurrency was worth a fraction of a cent. The $100-million, then $200-million and now $500-million pizza has become a thing of crypto lore. “It has no purpose. It’s worse than gold,” says Park of bitcoin. “As least with gold you can put it in your teeth.”
Which brings us to the more pressing fear that’s luring some from the traditional corporate and finance world to cryptocurrencies—the fear of missing out. While bitcoin “used to be something only your crazy uncle talked about at Christmas,” the dramatic run-up in prices over the past year has forced professional money managers to take a closer look, says Kevin Muir. He’s a former bank trader who writes the MacroTourist newsletter and has been a long-standing bitcoin skeptic. “People don’t understand how big FOMO is for professional investors,” he says. “Unlike retail investors, you can’t afford to miss out.” To that end he has increasingly heard senior pension plan managers ponder the future of the cryptocurrency, though he isn’t aware of any who are ready to pull the trigger. “It would be completely irresponsible for institutions to be getting into this,” he says.
As for other traditional companies that have become bitcoin hoarders, the list is not long. A website called Bitcoin Treasuries posts a running tally of two dozen publicly traded companies holding bitcoin, but most are cryptocurrency businesses, like bitcoin miners or Toronto Stock Exchange–traded Galaxy Digital Holdings. It holds a position in a U.S. cryptocurrency asset management firm with the same name that is the sub-adviser on the upcoming CI Galaxy Bitcoin and CI Galaxy Ethereum ETFs.
Bitcoin enthusiasts dare to dream, though. RBC Capital Markets analyst Mitch Steves wrote a report in February laying out the case for Apple to enter the crypto-exchange business. In it, he suggested the world’s most valuable company could buy bitcoin for its own balance sheet (a US$5-billion purchase would consume just 20 to 25 days of free cash flow, he noted). The bitcoin community cheered the prospect.
So far, Canada’s banks have been relatively circumspect about their views of cryptocurrencies compared to their U.S. counterparts. Requests to each of the Big Five banks about their respective stance on bitcoin were met with either a “no comment” or no response at all. In January, Victor Dodig, the CEO of Canadian Imperial Bank of Commerce, did stray from the pack during a television interview with BNN Bloomberg when he ventured that “over the medium to long term, some [cryptocurrencies] will be considered a legitimate store of value, and we’ll adapt to it at that point.” But the bank declined to elaborate further.
“The reluctance on the part of Canadian banks or even Canadian companies in general is because bitcoin is still an asset class that remains highly volatile and subject to sentiment,” says Robert Colangelo. The senior vice-president of the global financial institutions group at DBRS Morningstar wrote a report in February explaining why the big banks are likely to keep their balance sheets bitcoin-free. “There’s still this stigma attached to bitcoin and crypto that it’s used for illicit activity, and until that wears off I don’t think you’re going to see a lot of movement on cryptocurrencies from the big banks.”
He sees Canadian banks eventually holding small amounts of crypto to support trading activity by customers of their wholesale banking businesses. But under International Financial Reporting Standards, cryptocurrency holdings are not considered cash, which makes them a risky asset. Banks must test intangible assets on their balance sheets at least annually to ensure their value is not being overstated, and the wild swings in bitcoin prices could result in write-offs and charges against earnings.
There are other practical hurdles to bitcoin’s wider acceptance as an actual private and secure medium of exchange, and not just something to be hoarded. While the number of merchants accepting bitcoin is growing, the tax treatment can be maddeningly complex. Tax authorities view cryptocurrencies as a commodity and not a currency, meaning that their use in paying for goods or services is considered a barter transaction, says Laura Gheorghiu, a partner in tax law at Gowling WLG in Montreal. A business that accepts bitcoin as payment has the usual business income to consider at tax time, but also what happens to the price of bitcoin by the time the cryptocurrency is sold or used to buy other goods—there could be a sizeable capital gain or loss that also must be considered.
“It’s impractical to hold crypto long term because of the value fluctuation,” Gheorghiu says. “That volatility is holding a lot of companies back, and the ability to convert it back into something that is both more stable and matches with the tax treatment is a big impediment.”
Then there are the pitfalls that have always accompanied bitcoin, like its reputation as a haven for money launderers, the spectacular and all-too-frequent collapse of bitcoin exchanges, and the grotesque environmental impact of cryptocurrency mining operations that consume as much energy as whole countries. A company that is considering buying or trading in bitcoin might do well to read the risk factors section of the prospectuses filed with regulators for the flurry of new bitcoin ETFs: “attacks on the Bitcoin Network risk,” “increased regulation of bitcoin risk,” “loss of private keys risk,” “energy consumption risk,” “hacking of bitcoin trading platforms risk” and “control of the bitcoin network risk,” to name just a few.
Even with those risks, the mainstreaming of bitcoin is well under way. But that itself could pose a threat to the cryptocurrency, says Kevin Muir. “I think bitcoin has reached a critical mass where enough people view it as acceptable, and that’s a danger in and of itself,” he says, pointing to recent scrutiny from the European Central Bank and U.S. Treasury Secretary Janet Yellen. “The more it becomes accepted, the more of a threat it poses to the government, and there’s no way they will allow that.” If governments shut down bitcoin exchanges, its price could fall dramatically. “My plan is to short the shit out of it on the way down,” Muir says.
Today, there are more than 5,000 different cryptocurrencies and other types of digital coins on the market besides bitcoin. There could soon be one more if the head of one of Canada’s smallest banks gets his way. In February, London, Ont.-based Versabank announced plans to launch the “world’s first bank-issued, deposit-based digital currency,” to be known as VCAD. David Taylor, the CEO of Versabank (2020 net income: $19.4 million, or 0.5 per cent of what CIBC, the smallest of the Big Five, earned that year), is no stranger to being a first mover. He launched Canada’s first branchless bank in the early 1990s. And in a cryptocurrency world dominated by volatile giants like bitcoin and Ethereum, many investors are “hodling”—holding on for dear life. He sees a niche for a stablecoin that doesn’t fluctuate wildly, is tethered to a fiat currency (in this case, the loonie) and can be deposited at a bank.
“There’s a subset of cryptocurrency people who don’t want the volatility and nefarious characters running exchanges and finding out their money is gone—they want the safety and comfort that a bank presents,” he says. While VCAD still needs approval from regulators, Taylor knows it will take work to distance his bank’s coin from bitcoin’s tarnished reputation. “It’s a huge obstacle I’ve got to overcome,” he says, “because when people hear what we’re doing they instantly think I’ve taken leave of my senses.”
Whether VCAD becomes a reality or not, other cryptocurrencies are on their way. Arguably the most pressing of the new entrants, as far as businesses and central bankers are concerned, will be the Facebook-backed stablecoin Diem. Originally named Libra, it’s gone through policy changes in an attempt to win regulatory approval, and Andreas Park sees it as a potential “game changer.” Among the partners that have signed on is e-commerce giant Shopify, based in Ottawa. Park believes it could catch on, especially among small businesses fed up with the 2% to 3% transaction fees they pay on electronic payments, most of which go to the banks. “It’s like a tax, and it’s a huge drag on the Canadian economy,” he says.
But cryptocurrencies like Diem also pose a direct challenge to the Bank of Canada’s ability to influence the economy through monetary policy if their popularity among businesses and consumers ever led to the loonie becoming obsolete. “There are all sorts of reasons people might find they have their hands on Diem, and it can become a real threat if people find it more convenient,” says Park, who recently took part in a Bank of Canada competition to design a central bank digital currency.
In February, in a speech titled “Changing how we pay,” Bank of Canada Deputy Governor Timothy Lane described the surge in cryptocurrency prices as a “speculative mania—an atmosphere in which one high-profile tweet is enough to trigger a sudden jump in price.” He said the bank has sped up its own efforts to launch a digital currency. The pandemic has accelerated the pace of Canada’s digital transformation. “Our work to prepare for the day when Canada might want to launch a digital loonie—backed by the Bank—has also accelerated.” Likewise, in testimony on Capitol Hill in February, outgoing U.S. Federal Reserve Chairman Jerome Powell said developing a digital dollar is a “very high priority project for us.”
And that could eventually put central bank–controlled digital currencies on a collision course with decentralized cryptocurrencies like bitcoin. Does such a prospect concern Christopher Gimmer? Not really, he says. It doesn’t alter his fundamental reason for Snappa to own bitcoin, which is to preserve the company’s cash. After all, central banks will be just as likely to inflate the supply of digital loonies and greenbacks as the physical kind. Nor does Gimmer—who added laser eyes to his Twitter image in February along with thousands of others as a rallying cry for bitcoin to hit US$100,000—put much stock in other risks dwelled on by bitcoin doubters. “With everything that’s happened, bitcoin has just de-risked so much over the last year,” he says. “My conviction in bitcoin is high.”
In other words, Gimmer and his company are hodling.
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