It seems everyone is talking about Bitcoin these days. And while this digital currency is usually associated with the get-rich-quick crowd, there are signs it is moving into the mainstream.
Nearly one-third of high-net-worth investors are considering investing in major virtual currencies such as Bitcoin and Ethereum as long-term investments, according to the latest World Wealth Report from Paris-based Capgemini.
Frank Holmes, chief executive officer and chief investment officer at Texas-based U.S. Global Investors Inc., is a long-time gold promoter turned cryptocurrency promoter. He launched a cryptocurrency fund in the United States for accredited investors last June hoping to cash in on the escalating popularity of digital currencies – especially in high-growth economies with less developed financial systems such as China and India. He expects one of the competing currencies to become the global standard to replace cash within 10 years.
“We don’t know who is going to win in the crypto space and blockchain revolution, but we know it’s big,” he says.
He cautions investors, however, that cryptocurrencies are risky. To illustrate Bitcoin’s volatility, the price skyrocketed to an historic closing high of nearly US$20,000 in mid-December from US$4,344 in October. Less than two months later it plunged to US$7,132.
More recently, Bitcoin dropped to an eight-week low on Tuesday, to US$5,880, while Ethereum, the second-largest cryptocurrency in terms of market value, sank to a more-than-one-year trough as they continued a bearish trend.
As further proof of Bitcoin’s risk, its daily trading volatility is measured as an 8-per-cent average deviation from the S&P 500. In comparison, the average volatility of gold bullion is a 1-per-cent deviation from the S&P 500, and gold stocks trade at a deviation of 3 per cent.
Mr. Holmes says he expects the digital currency market to be less volatile as it gains popularity. In the meantime, he suggests more conservative investors put their money into the blockchain technologies that support these currencies, as well as cryptocurrency infrastructure companies. One example he recommends is Digital Realty Trust Inc., which invests in data centres and other technology-related real estate.
“I think that’s a perfect slow-ball way to play this whole buildout,” he says.
He also advises high-net-worth investors to limit cryptocurrencies to a small part of a diversified portfolio. “Anyone going into this space, I would look at 2 per cent of your portfolio at max. It’s speculative money.”
Steve DiGregorio, portfolio manager at Montreal-based Canoe Financial, disagrees. He says the only value in cryptocurrencies is as a currency hedge for investors in financially unstable countries.
“If you’re living in a world of stable currency you probably don’t need it,” he says. “For a North American client I would say, ‘Do you really need to be there? It’s a speculative, unstable currency. You can own U.S. dollars instead.’”
Mr. DiGregorio says the investment rationale for Bitcoin makes less sense than the one for marijuana stocks (which he also doesn’t recommend at current valuations).
“Everybody understands how to smoke a joint. Nobody understands what the hell a cryptocurrency is,” he says.
Marijuana, he says, will generate cash. "You can actually make cash flow projections. You can look at the licences owned that have value. It’s very difficult to understand the real value of Bitcoin.”
That’s not to say digital currencies aren’t on Mr. DiGregorio’s radar screen. He compares the current market to the early days of the internet.
“I think the cryptocurrency market today is very much like the search-engine market of the 1990s. You had Yahoo and Excite dominating, and all of the sudden the phoenix, Google, came out. I don’t think we’ve seen the phoenix yet in the cryptocurrency market,” he says. “It’s too early right now to know who is going to be the winner.”
Patrick Horan, principal at Agilith Capital Inc. in Toronto, is also trying to steer clients clear of cryptocurrencies. He says the fundamental business model is flawed because their intrinsic value is arbitrary with no hard assets to back it up.
“The problem with Bitcoin and crypto is that you can literally invent a thousand different currencies and multiply that every year by a thousand. There is no barrier to entry,” he says.
He does, however, see potential in the ability of blockchain technologies to extend the current banking system and reduce transaction costs much like credit cards have. He compares the resulting efficiencies to the impact that operating systems have had on computers over the years.
“Operating systems were a tool for companies that allowed better productivity. I think that’s what blockchain is going to be,” he says.
Mr. Horan says the only indirect exposure he has to blockchain technology is potentially through his holdings in a company called VersaPay Corp. VersaPay is a cloud-based invoice service that links businesses and helps them automate accounts receivable and process electronic payments.
“They’re not technically blockchain, but they basically allow a streamlining of accounts payable to happen between a customer and the bank, and a payee,” he says.
For now, Mr. Horan says he’ll hold off on blockchain and cryptocurrencies until the hype dies down. “We’re keeping an eye on it,” he says.