Our takeaways on Bitcoin and other cryptocurrencies

Nader Hamid, Portfolio Manager with TWM Group at iA Private Wealth presents our video. You can also see this video in French presented by Jean Hénault by clicking here

If Bitcoin and cryptocurrencies have you confused, or you’re trying to get your head around their popularity, we think this video may interest you.

There’s been a lot of hype regarding digital currencies. We’ll save the mechanics of exactly how they work for another communication. Today, we’ll focus on why they’re loved and hated.

Besides the allure of making quick money speculating, there are a few underlying theories of why there’s so much excitement around cryptos, particularly Bitcoin, which currently has a 48% market share of a 1.4 trillion-dollar space.

A digital currency

The first reason there’s so much interest is the potential to replace all fiat currency, suggesting a lack of confidence in government legal tender: Euros, US dollars and every other major money denomination.

Many use Argentina’s peso as an example of what could happen.

The reality is that complete fiat replacement would be very hard to accomplish for cryptocurrencies, especially in first-world countries. There are too many barriers to overcome. Technological, governance, organizational, and even societal norms would have to be completely transformed.

A digital gold

Another ongoing theory is that cryptocurrencies could be a replacement for gold. A digital gold, if you will. Gold has traditionally acted as a safety bet or a type of insurance on fiat currencies.

The current gold market stands at ten times the cryptocurrency market size, so some say the upside potential as a replacement is quite large. However, when we take away the industrial and personal uses for gold, the safety component is much smaller, only approximately two times the market’s current size, limiting its potential.

Cryptocurrencies have no alternative uses, which lessens the likelihood of reaching the size of the current gold market.

On the flip side, many headwinds are prevalent when speaking about cryptocurrencies, particularly Bitcoin. This makes their mainstream adoption unclear and speculative, which explains its high volatility.

On the one hand, crypto advocates highlight decentralization, security and scalability as some of their advantages.

Not really decentralized

Although there’s much talk about decentralization, the majority is owned by a few large whales. In particular, when referring to Bitcoin, many individuals own a very small amount, and a few people own a very large quantity.

In addition, the majority of the mining is done in a few emerging market countries where energy costs are low. Some of these countries have governments with excessive influence on internal commercial activities, which opens the door to crypto price manipulation. China is the most recent example highlighting this point.

Security is an additional concern.

Although blockchain cannot be hacked, most crypto held at exchanges can and have been, and it’s the reason for many lost digital fortunes.

One of the things we dislike and can’t get our heads around is its pervasive way of financing a number of illegal activities, including ransomware.

Most companies’ first experience with crypto is for these types of hostage-like payments. And surprisingly, since 2017, the use of crypto for legal purposes has stayed flat, although there’s been a global explosion in online and digital transactions, meaning most cryptocurrencies have been purchased for speculation and not as a currency.

A diversifier?

We’ve considered adding crypto as a diversifier. However, we’ve noticed that it’s becoming more and more correlated with the financial markets. In addition, it’s significantly more volatile than traditional investments and other currencies.

The Key Takeaway

For the moment, cryptos are not a real currency and have too many uncertainties to be considered in our portfolios.

In addition, the fact that criminal organizations primarily use them doesn’t align with our values.

So, for now, we’re happy to sit on the sidelines and continue to study the story as it unfolds, especially when considering it would not add a significant gain when compared to the amount of risk taken.

If you’d like more information on this topic, feel free to contact us. On behalf of the TWM Group, thank you, and see you next time.

Sources:

Financial Times (2020) Argentina on ‘collision course’ towards currency devaluation.

Invesco (2021) Exploring Cryptocurrencies. Ashley Oerth, Investment Strategy Analyst and Drew Thornton, CFA, Head of Solutions Thought Leadership, as of 30 April 2021.

BCA (2021) Cryptocurrencies: The Future Or A Fraud? – Dhaval Joshi, Chief Strategist

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