Should a Canadian Invest in Bitcoin?

In 2013, the value of a Bitcoin has soared from $12.95 to $108 as of Tuesday’s close. That’s a 733% move (2023% at it’s $275 high!). This is from an asset that could benefit from weakness in traditional currencies and act as a potential equity hedge. I had to take closer look. Unfortunately, Bitcoin did not stack up.

Value of Bitcoin in CAD (Last 30 Days)

With no gold standard today, why does money have value? There will always be demand for traditional currency because governments can dictate that it must be used for all transactions within their boarders. The government can then stabilize the currency for its citizens through interest rate adjustments and the rate of money creation. Conversely, Bitcoin has no jurisdiction, it pays no interest because it has no citizens to tax, and has no central authority to match money supply with demand. 

Instead of printing money like a government would, ‘miners’ (virtual not literal) are awarded Bitcoins in exchange for solving complex problems using their computing power. Solving these 'problems' provides no economic value but is just a way to decide who gets the new coins! Difficulty is adjusted to ensure coins are awarded at a predetermined rate. New interest from the media in the virtual currency has attracted a flood of new investors which mining activity cannot keep up with. What is scary is a change in regulations, loss of confidence in its security or just fading interest could trigger a sell off with no government to stabilize its value. 

Bitcoins are generally only accepted at online black markets and I don’t see them being used at Amazon any time soon. Since you can’t convert it into goods and services, you are at the mercy of online currency exchanges to convert your virtual wallet into something tangible. The opposite would be something like TTC tokens. They have zero secondary market but can always be redeemed for a ride!

Long term demand is another question mark. The value of all the Bitcoins in the world is only about $500 million USD. A single large investor entering or exiting the market can significantly move the price. If you're holding this stuff, you could be depending on the Winklevoss Twins to support the currency (rumored to be the largest holders of Bitcoin). 

My feeling is Bitcoin has no place in an investor’s portfolio. There are far better conventional sources of currency diversification using ETFs.