NCFA Guest post | Laura Buckler | May 18, 2018

2017 was a big year for cryptocurrency, and we’re still witnessing the power of this trend. Cryptocurrencies and digital assets are arguably one of the most liberating and transformative fintech innovations of our time, attracting a growing number of retail and institutional investors yet they challenge the status quo and are difficult to regulate.

Olaf Carlson-Wee, founder of cryptocurrency hedge, said it well: “We are seeing more managed money and, to an extent, institutional money entering the space. Anecdotally speaking, I know of many people who are working at hedge funds or other investment managers who are trading cryptocurrency personally, the question is, when do people start doing it with their firms and funds?”

It’s a good question, and it’s only a matter of time before we see that happening on a large scale. Cryptocurrency will irreversibly change the course of our society’s development.

This is what most people are wondering about: is cryptocurrency the investment opportunity of a lifetime? People are rushing to get in before it’s too late, so are they doing the right thing?

The answer is more complex than a simple yes or no.

The Positive Sides of Cryptocurrency Investments

Why should you invest in cryptocurrencies? Because of the potential return. Ronnie Moas, independent research analyst, predicted the growth of Bitcoin and Ethereum well enough: “Bitcoin is already up 500 percent since I recommended it in the beginning of July, and I’m looking for another 500 percent move from here,” – he said. The prediction continues: “The end-game on Bitcoin is that it will hit $300,000 to $400,000 in my opinion, and it will be the most valuable currency in the world.

Here are few reasons to go for it:

1. Exchange fees are minimal, usually circling around the rate of 0.2%. In comparison, the Bank of Canada has set much higher fees for foreign currency. The exchange fee for Swiss franc, for example, is around 1.27%, and UK pound sterling is being exchanged with a fee of 1.7293%.
2. The process of investment is very easy. Many digital asset exchanges have simple on-boarding processes and advanced features to help investors with online wallets, several trading options and multiple currencies.
3. Political instability is pretty good for cryptocurrencies. Global and local political issues are usually bad for the stock market. The reason for that? Stock markets are tied to companies that depend on strong financial institutions and government services. Cryptocurrency is independent from those factors. In May 2017, major stock markets dropped because of the potential for scandals between U.S. and Brazilian presidencies. Bitcoin, on the other hand, rose more than 3.5%. Currently, the world is experiencing serious political instability, which could be a sign of growth for cryptocurrencies. There’s proof for that, too: due to the recent nuclear deal crisis, Iranian investors started turning to Bitcoin.
4. Beyond straight investments, many cryptocurrencies offer perks to owners and they can be used to purchase products and services with the number of merchants and markets accepting crypto growing globally with each passing day.

The wave of optimism regarding cryptocurrencies is more than justified. But are there any risks that could undermine the success of this investment?

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Potential Issues to Consider

1. Cryptocurrencies are not immune to design issues. Transaction times, in particular are a serious problem for the Bitcoin network. In August 2017, we saw a phenomenon called “hard fork,” when the blockchain split in two. The split led to the creation of Bitcoin Cash – a spinoff of the cryptocurrency. With an unknown future, it’s safe to tread carefully.
2. The interest in cryptocurrencies is constantly increasing, and that’s clogging the blockchain network. The design is not strong enough to cope with all that traffic.
3. The huge interest imposes another problem: there are too many speculators who expect cryptocurrencies to grow rapidly and provide high margin returns but how these currencies are valued remains to be seen. The market is also suffocated with people who think that Bitcoin is going to become a widely used currency for daily purchases but the volatility makes the use of bitcoin as a payment system impractical. Both of these groups could be wrong.
4. The biggest issue, however, are the unexpectedly big listing fees. According to an investigation by Business Insider, cryptocurrency exchanges charge between $50,000 and $1 million to list initial coin offerings. One CEO told Business Insider that a top-tier exchange asked for $1 million to list their coins. “Good exchange means a high probability of good market fit, because you have access to liquidity and investors,” – sаid Oliver Bussmann, owner of a Swiss fintech advisory firm. “If you don’t get access to certain exchanges, then it’s tier two exchanges, which means access to investors is limited.”

What conclusion does this bring us to?

The discussion is complex and no one can correctly predict the future of cryptocurrencies. As in any other investment, risk is still involved. The expectations are bright, but we mustn’t neglect the problems related to these investments. The only thing we can recommend is to get well informed before making any investment.

Laura Buckler is a freelance writer and contributor at https://essays.scholaradvisor.com/ who brings a hands-on approach to each of her in-depth articles. Through her work as a social media marketer, she learned many skills in are the areas of social media, content writing and digital marketing. Find her on Twitter.

Check out: 

• CSA Staff Notice 46-307: Cryptocurrency Offerings

• NCFA Canada’s response to BCSC Notice 2018/1 ‘Consulting on the Securities Law Framework for Fintech Regulation’

• Guide to Canadian cryptocurrency taxation