Earlier this month, Vancouver-based First Block Capital announced that its flagship product, a private fund called FBC Bitcoin Trust, initially launched about a year ago, was now available to hold in registered accounts like RRSPs or TFSAs. The fund, available only to accredited investors and sold by offering memorandum, holds the largest cryptocurrency, Bitcoin, as its sole investment and thus offers direct exposure to Bitcoin's price fluctuations.
But just because you can hold Bitcoin in your retirement savings account doesn't necessarily mean you should. As with any risky investment proposition, the decision depends on three major factors: your risk tolerance, your asset allocation strategy and your investment horizon.
And of course, remember Warren Buffett's rule of thumb: if you don't understand it, don't invest in it.
A high-risk proposition
"[FBC Bitcoin Trust] is meant for institutions, or high-net-worth individuals that want to buy and take a long position in Bitcoin -- $10,000, $1 million, $5 million plus," said Sean Clark, co-founder and CEO of First Block Capital, who compares FBC Bitcoin Trust to early-days investing in the internet.
Cryptocurrency is a highly speculative investment, mainly because of the volatility and new nature of the asset class itself. The oldest cryptocurrency, Bitcoin, is less than 10 years old.
"Bitcoin and cryptocurrencies are extremely high-risk, they have no proven track record, and the asset class is in its infancy. They're not for the faint of heart," says David Lee, financial advisor at BlueShore Financial. "Added to the volatility, there are no clear metrics to valuate it, whether price-to-earnings, revenues or yield. Additionally, there are concerns around regulation, fraud, theft and money laundering with Bitcoin, so I don't recommend it."
Because of the extreme volatility of cryptocurrencies, only an investor with a very high appetite for risk should consider it as an investment.
"If you believe fundamentally that the fiat currency is not as valuable as it used to be, and if you believe that more businesses will adopt cryptocurrency for commerce, then cryptocurrency might make sense as an investment," says Kunal Parshotam, partner at MP Group, an accounting and advisory firm specializing in blockchain and cryptocurrency.
Asset allocation
So if you have a high risk tolerance and want to invest in cryptocurrency, how much should you allocate to it?
"We recommend that 1% to 5% of your net assets in total should have some exposure to cryptocurrency," says Clark.
Raffael Mazze of MP Group is also very conservative in his recommendations. Around 1% of net assets is where he believes you should cap an investment in cryptocurrency.
Is Bitcoin the new gold?
Mazze believes cryptocurrencies can work as an insurance policy or hedge against inflation in a portfolio. "I would consider cryptocurrency as a sort of digital gold," he says. "Investing in Bitcoin would be like buying a call option on digital gold.
But how do cryptocurrencies stack up against gold?
Morningstar analyst Kristoffer Inton created a framework to test whether or not an asset could be considered a safe haven. The five components by which an asset is evaluated are liquidity, functional purpose, scarcity of supply, permanence and future demand certainty. Gold ticks all five boxes, making it a safe-haven investment. Bitcoin, on the other hand, is not liquid, does not have a functional purpose, and there is no future demand certainty. However, Bitcoin does have scarce supply and permanence.
"Based on our analysis, we think it's unlikely that cryptocurrency will meaningfully attract safe-haven investment dollars away from gold," Inton says.
So far, Bitcoin and cryptocurrency make sense for investors who are extremely high risk, and are willing to lose money in a speculative asset. Which then begs the question: how long should you hold?
Timeframe
"We are long on the space. We believe digital currency asset classes, which include Bitcoin, Ethereum and other altcoins will exceed trillions of dollars," Clark said.
Because of the freefall that cryptocurrencies are experiencing, some investors may feel that the price makes them a good pick. Earlier this week, the MVIS CryptoCompare Digital Assets 10 Index, which has 10 cryptocurrencies as its components, fell more than 80% from its high in January. In comparison, the NASDAQ Composite Index fell 78% during the dot-com burst of 2000.
However, Lee does not believe that cryptocurrency is a long-term investment because in the short term, volatile cryptocurrencies could lose significant value. "If you do want to invest or hold cryptocurrency, that should be done in your self-directed trading account, not your retirement account," Lee said.
But trading comes with its own risks -- primary among them, tax.
"If you trade cryptocurrency to cryptocurrency, it is considered a barter trade by the Canada Revenue Agency. As a result, you may be taxed on any trade you made from one coin to another coin if the former coin had accrued gains even when you have not in fact sold the coin for fiat. It is also important to note that the CRA classifies cryptocurrency as a commodity, and as such, you cannot pay taxes using bitcoin for example. So if you are obligated to pay tax on the gains from crypto to crypto trading, you will have to dispose cryptocurrency to make payment," Parshotam says.
But even beyond tax, trading cryptocurrency comes with very high risk.
"For one thing, in a lot of altcoin currencies, there aren't very large volumes. Early investors who hold a lot of the supply, could move prices significantly. As a result, trading could be very volatile," Parshotam noted.
