Before You Buy Cryptocurrency, Understand What You are Investing in
Cryptocurrency (“crypto”) is digital money based on blockchain technology—a decentralized, distributed digital ledger. Therefore, at its core, crypto is a decentralized digital medium of exchange that is designed to be used over the internet.
Unlike other currencies such as the Canadian dollar, no central authority (such as a government or bank) manages and maintains the value of a cryptocurrency. Its value is driven entirely by supply and demand.
Before you buy crypto, understand what you are investing in. What can you buy with crypto, and should you invest in it?
What can You Buy with Cryptocurrency?
There are a number of goods and services you can buy with cryptocurrencies, at accepting entities—usually high end items such as cars or luxury watches. However, it is a form of payment that at present has not quite gained mainstream acceptance.
Keep in mind that cryptocurrency is just a generic term—there are numerous different cryptocurrencies in circulation. Bitcoin, Litecoin and Zcash are some of the more popular examples.
Though crypto can be exchanged for goods and services at accepting entities, they are more commonly used as investment vehicles.
Should You Invest in Cryptocurrency?
Cryptocurrencies can increase your portfolio diversification as they have historically shown almost no price correlation with stock markets.
There are many stories on social media of people getting rich quick by investing in crypto, but what you don’t usually hear about is that you can also face the possibility of losing money—a potentially extremely profitable but risky investment.
There are numerous risks associated with crypto. Some of these concerns include: 1) cyberattacks; 2) fierce competition; and 3) evolving regulations.
In Canada, crypto is regulated as a security, similar to stocks and bonds. Though regulated, crypto is still not considered legal tender under the Bank of Canada Act. From a tax perspective, the asset is treated as a commodity by the Canadian Revenue Agency (CRA), and is not considered “money” for the purposes of the Income Tax Act.
Like all investments, investors must decide themselves if the benefits outweigh these risks.
Ask yourself essential questions, such as: 1) Have I done thorough research? 2) Do I understand the associated risks? 3) Am I looking for a short- or long-term investment?
If you are seeking to invest long-term, you should do your due diligence to ensure that the crypto you invest in will stand the test of time. You should also understand that unlike the stock market, crypto has only recently found its “fame” and does not have much of a track record.
Lastly, beware of crypto crime—crypto fraud and crypto scams, including but not limited to fake websites, “celebrity” endorsements, and virtual Ponzi schemes.
The Bottom Line
If investing in cryptocurrencies is not for you or your clients, but you still wish to diversify your portfolio, you may wish to work with a traditional investment manager whose investment methodology is deeply rooted in preserving and building wealth for the future, and who can also help guide you and work with a specialist in the particular digital asset space of interest.
This content is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this content should consult with his or her financial partner or advisor.