After the bursting of the cryptocurrency bubble in 2018, bitcoin was given for dead. That hasn’t stopped it from making a strong comeback and reaching new heights in 2021. If the digital asset remains risky, some experts believe that this time the popular digital currency will prevail for good.
Philippe Bergeron-Bélanger is convinced that bitcoin has found its niche as a safe haven for tomorrow’s economy. The independent investor remained suspicious when bitcoin experienced its first rise in value, in July 2017. Four years ago, bitcoin was presented as one cryptocurrency among many others. It was the best known, of course, but it embodied a technological shift so vast that ordinary mortals had difficulty imagining it.
How to understand blockchain, decentralized transaction ledger or token financing? Imagine: the first promised to eliminate counterfeiting by replacing an outdated banking system, the second intended to eradicate fraud in the global financial system and the third promised to fund new businesses by creating your own digital currency. The revolution!
Dumbfounded by these mirages, investors rushed to bitcoin. Result: its value multiplied by 10 in six months, reaching a peak of US$19,650 in mid-December 2017. The plunge that followed lasted a year. After a surge in 2019, bitcoin only started to rise again in mid-2020, but again investors got carried away: its value hit new highs before the end of the year, but this times, it still goes on. We don’t know when it will stop.
“That’s probably the main change between 2018 and 2021: at the time, it was presented as a package of exotic technologies, difficult to understand. This time, bitcoin has found an easier role to grasp: it seeks to become the reference tool for exchanging international currencies, in a digital and dematerialized economy where safe havens such as gold have less relevance,” believes Philippe Bergeron-Bélanger.
A new credibility
In 2021, “buying bitcoins” and “investing in bitcoins” are two sides of the same coin. While experts don’t see this digital platform replacing cash for grocery shopping, some believe it qualifies as a digital asset with a certain value that fluctuates, and fluctuates a lot, over time.
For many, this is what makes the game interesting. Some will use a direct brokerage application, such as Coinbase, PayPal or Robinhood (the latter, exclusive to the American market, remains the most popular of the lot) to acquire a few fractions of bitcoins. Others will look for stock funds that replicate the evolution of digital currency.
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In Gatineau, the firm Rivemont created the first cryptocurrency fund in Canada at the end of 2017. Approved by the Autorité des marchés financiers (AMF), this fund, which is currently worth 10 million dollars (M$), is composed mainly of bitcoins and certain other secondary digital currencies, such as Ethereum and Litecoin, and it is actively managed, as if it were stock exchanges.
For this fund, Rivemont buys and sells its assets on a reliable and recognized platform, called Gemini. Founded by the Winklevoss brothers, who helped found Facebook, Gemini specializes in cryptocurrency exchanges and complies with financial industry rules. There is no risk that its creators will disappear without warning and pocket the sums negotiated by its users, according to Martin Lalonde, the president of Rivemont.
A well-founded fear, since this happened in Canada in the case of the exchange platform specializing in Quadriga cryptocurrencies. The Vancouver-based company turned out to be a typical case of pyramid scheme organized by its late founder, Gerald Cotten, according to an investigation by the Ontario Securities Commission.
Popular platforms in 2021 are safer, but the risk is no less. “Bitcoin comes with its share of risks: volatility, speculation, etc. Platforms like Gemini, at least, eliminate most of the risk of fraud, assures Martin Lalonde. This adds to the credibility of major cryptocurrencies.
Towards a new bubble?
Another element in favor of this credibility: in early February, Tesla bought 1.5 billion US dollars (US$B) worth of bitcoins in order, according to its CEO Elon Musk, to eventually accept payments in this currency for its vehicles. electrical. Less noisy, another announcement was made a few days earlier by Visa, which launched a new tool allowing individuals from certain banks in the United States to buy bitcoins directly from their online bank account.
For the promoters of digital currencies, it was two more proofs that bitcoin is now a “mainstream” asset, accepted and endorsed by recognized companies. Elon Musk is full of praise for cryptocurrencies in general, by the way. A tweet he posted about Dogecoin, when his company was buying bitcoins, confirmed it: Dogecoin is a cryptocurrency that was launched as a joke in 2013 and has very limited usefulness, if not nothing. Its value jumped 80% within hours of that tweet.
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For detractors of bitcoin, it’s the coin too many, a good demonstration that this is a new bubble that will burst one day. At least that’s what American short seller Michael Burry says, who sees the whole thing as a smokescreen to distract investors from the fact that Tesla is under pressure in China, where the automaker is gambling its future. “Chinese authorities are concerned about the quality and reliability of Teslas… but Tesla prefers to buy bitcoins,” Burry reacted.
Interesting detail: Tesla’s stock market evolution and bitcoin’s value fluctuations follow roughly identical curves. Either way, analysts are at a loss for words to explain investor enthusiasm. Tesla is only profitable because of significant federal aid in the United States. Bitcoin could well become a safe haven, but nothing is won yet.
In short, if we are witnessing a speculative bubble and the bubble bursts, not only virtual coins will fall from the sky. At least one automaker could pay the price as well.
The Wild West of investing
Elon Musk is not the only social media user to have some influence in the financial sector. Over the winter, the web forum Reddit has also positioned itself as an influential stock market player. Internet users who meet on this forum to exchange investment advice have caused the stock prices of companies that we thought were dying, such as BlackBerry and GameStop, to jump in just a few weeks, in order to attack the dubious practices of certain short sellers.
These same Internet users are also supporters of cryptocurrencies in general and bitcoin in particular. All they have to do is praise it for thousands of small investors to rush to their smartphones and invest some of their money in it. Mobile apps facilitate these mass financial movements because they bypass the institutions and mechanisms that function to temper surges and reduce volatility.
What seems perfectly normal for a new generation of retail investors is puzzling for portfolio management professionals: the digital shift has turned the worlds of commerce, transport and real estate upside down. It is subjecting the financial sector to the same fate.
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“The sector has no choice but to adapt. It’s a whole new reality. Clients call us and demand that we invest part of their portfolio in it,” notes a portfolio manager associated with a major Canadian bank who requested anonymity to be able to speak freely. “So we explain to them what it means to invest. Who knows if the market will not collapse tomorrow morning? It takes a very high tolerance for risk. Above all, do not bet all your savings on a single asset. Weighted investing would be a reasonable approach. »
The experienced Montreal manager believes that financial institutions will have no choice but to follow suit and add bitcoin to their investment offerings. “After all, if JP Morgan does…”
Advisors have no choice but to respect the investor profile of their clients. They will have to dilute the risk of buying bitcoins by offering other less volatile assets, he predicts. “They are going to want to temporize, too, to buy cryptos at different prices, to reduce the effect of volatility on their return. Because at over US$50,000 bitcoin is still expensive…”
At what price is bitcoin “expensive”?
This is another bitcoin problem: no one agrees on its real value. Difficult to make projections on its value in one year, in five years or in 10 years.
The most optimistic compare the price of bitcoin to that of gold. “Today, if all the gold in the world is worth 10,000 billion dollars, it is not because it is used to make jewelry, but because over time it has become a reference for establishing the value of other goods and currencies. The only thing that bitcoin is doing at the moment is bringing this reference value to the digital world, ”judges Philippe Bergeron-Bélanger. “We don’t know how much a bitcoin is really worth; the entire financial ecosystem that is being built around this currency gives confidence in its future. »
Martin Lalonde agrees. “There’s a ripple effect that’s inflating its value right now, but in the long run, I think the frontrunners will be rewarded. Bitcoin has the potential to be big. There is always a risk that it will not happen. In investing, risk and return go hand in hand, recalls the portfolio manager. The greater the risk, the more promising the return.