We left off part 1 of our Bitcoin Series with the determination that Cryptocurrency could be a
legitimate asset class.
However, in order to determine how much it is worth and what it could be worth in the future,
we need to recognize how current investors are thinking about its value.
I will start by focusing on Bitcoin, as it was one of the original cryptocurrencies developed in
2009 by an individual or a group known as Satoshi Nakamoto (though the true origins remain
disputed to this day). Ponder for a moment that the internet was designed by two computer
scientists Cerf and Kahan in the 1980s while it was not widely adopted for another decade, who
could have imagined the profound impact it would have on our daily lives. Similarly, it was hard
to imagine the mobile phone that started out as big as briefcase in the 1970s would bypass
landlines and become the primary communication for Maasai warriors in Kenya? Given the
meteoric growth of both these technologies – Crypto could be set for the same trajectory –
which is a bit unsettling.
Although many investors are buying Bitcoin simply due to FOMO (fear of missing out), as they
believe that it will be worth more in the future (speculating, a fancy finance term for gambling) there are some aspects of this asset class that are attractive and demonstrate promise as a
valuable new asset class worth considering in the future.
In my opinion there are 5 main things to consider when thinking about the pros and cons of
Let’s discuss each of these issues
It was designed to have a limited supply with no more than 21 million bitcoin to ever exist.
Currently, 18.6 million have been created. This scarcity of Crypto is a stark contrast to the
oversupply of FIAT money discussed in Part 1 of the Bitcoin series. As I am writing this, the US
government passed another $1.9 trillion in stimulus further increasing its astronomical debt. No
wonder many investors are looking for assets than can not be quickly de-valued at will.
Store of Value:
Since active government “printing” such as funding of Covid relief, new social programs and
clean energy spending etc. are showing no signs of slowing down, anyone holding cash (FIAT
money) or government bonds is worried about how, if and when the government will pay back
the loans that keep growing. The simple argument is: if more money is printed, current money
becomes less valuable. (Think extending a loan to someone with a giant mortgage and maxed
credit cards likely increases your risk of not seeing your money back soon, or even at all).
Therefore, investors in search of protecting their wealth are looking to buy other assets (stores
of value) such as real estate, gold, etc. Bitcoin, if indeed scarce can function as “digital gold”
and possibly be that store of value although it cannot be seen, touched or fashioned into
But, to be considered a store of value the asset should not be extremely volatile (go up and
down in value significantly is a short amount of time). The Bitcoin price of course has been
extremely volatile during it’s short existence. For example, in 2017 it first reached
approximately $20,000 USD per Bitcoin only to collapse to $3,000 USD and slowly make its way
back to around $13,000 USD and remain in that range until 2020 when it once again shot up to
its current value of almost $60,000 USD in a matter of months. So, if you had agreed to be paid
in Bitcoin in 2020 you would have been thrilled, but a mortgage borrowed in Bitcoin would
have been catastrophic.
As with internet and mobile phones, even great ideas often need time to reach their full
potential. Typically, when they reach a critical adoption rate. Bitcoin and/or other crypto will
have value if it is actively used as payment. Although Bitcoin appears to have limited supply in
order to have a stable value or price we need to be clear about the demand. Will it be used? By
whom, how often and when? For example, you can price your artwork $50,000 and perhaps a
gallery recognizes your talent and displays it with a $100,000 price tag, but it will only be truly
worth $100,000 if it is purchased by someone at that price.
Security & Regulation:
The anti-money laundering (AML) regulation was extended to Bitcoin transactions only in 2013.
The AML regulation was enacted to curb illegal activity worldwide and is the reason you have
are peppered with questions at the bank if you are depositing or withdrawing $10,000 or more
in cash. This and other regulation (government oversight) is important to legitimize Bitcoin and
other crypto so that it can be easily accessed, exchanged and safely stored. Some governments
such as India banned crypto, others like China did in theory, however many crypto mining
operations remain active there. Both the U.S. Treasury and the IRS are paying attention,
however actual regulation or a ban is proving very challenging to execute. In fact, many
governments (Russia, China, Japan and even the US) are looking to establish their own
government-issued or controlled CBCD “central bank digital currency”.
Mining for Bitcoin is a “dirty business”. While Bitcoin itself is virtual, the energy required to
maintain the security and integrity of the crypto currency is not. “The Bitcoin algorithm
demands increasing amounts of computational power to validate transactions. The online tool
has ranked Bitcoin’s electricity consumption above Argentina (121 TWh), the Netherlands
(108.8 TWh) and the United Arab Emirates (113.20 TWh) – and it is gradually creeping up on
Norway (122.20 TWh).
IF it were a country, its annualized estimated carbon footprint would be comparable to New
Zealand at about 37 million tons of carbon dioxide. (Source: Bloomberg News).
Yulia Rosenberg, B. Comm, MBA | Senior Wealth Advisor
Scotia Wealth Management™ | ScotiaMcLeod®, a division of Scotia Capital Inc.