1.5.4 Cryptocurrency

Introduction to Cryptocurrency

Cryptocurrency and cryptoassets have been growing in popularity around the world. Cryptoassets are purely digital and utilize cryptography to prevent counterfeiting and fraudulent transactions, relying on peer-to-peer networking and a public ledger to control the creation and transfer of assets without intermediaries. A notable example of a cryptoasset is Bitcoin, a cryptocurrency that made its debut in 2009.

Bitcoin: The Forefront of Cryptocurrency

Bitcoin, the largest and most actively traded cryptocurrency, is making its way into traditional investing. Despite its growing footprint, Bitcoin still faces substantial investor concerns and regulatory challenges far beyond traditional investments such as stocks and bonds.

Bitcoin Investment Vehicles

Here are some of the Bitcoin investment options:

• Trusts and Funds:
  • Mutual Funds
  • Hedge Funds
  • The recently listed closed-end Bitcoin Fund in Canada
• Futures and Options
• ETFs: Limited to Europe, as North American regulators are yet to approve Bitcoin ETFs. Related blockchain ETFs are trading in the United States.
• Capital Investments:
  • Venture Capital
  • Private Equity

Direct Access to Bitcoin

Other methods to directly access Bitcoin include:

• Peer-to-peer exchanges
• Licensed and unlicensed exchanges
• Bitcoin ATMs

Key Technology: Blockchain

Bitcoin operates through a public and shared ledger powered by open-source code known as blockchain. Blockchain creates a shared public ledger available to record and validate all past transactions, which are unalterable. Each transaction forms a “block” that is part of the “chain,” creating a permanent record.

    flowchart TB
	    A(Block) --> B(Block)
	    B(Block) --> C(Block)
	    C(Block) --> D(Block)
	    style A fill:#f9f,stroke:#333,stroke-width:2px;
	    style B fill:#9f9,stroke:#333,stroke-width:2px;
	    style C fill:#9ff,stroke:#333,stroke-width:2px;
	    style D fill:#ff6,stroke:#333,stroke-width:2px;

Proliferation of Cryptocurrencies

The underpinning blockchain technology has enabled the creation of more than 2,200 cryptocurrencies following Bitcoin.

The Value and Impact of Bitcoin

Bitcoin’s value is derived from its role as both a medium of exchange (intrinsic value) and a store of value (monetary value). More recently, Bitcoin has started to be considered as a distinct asset class that offers diversification benefits to a conventional portfolio consisting of stocks and bonds.

Bitcoin’s unique characteristics have catalyzed the disruption of:

• Money
• Gold
• Store of value
• Payments and remittances

As financial services pivot to digital platforms, interest in Bitcoin surges, with some investors euphemistically referring to it as “digital gold.”

Key Takeaways

• Cryptoassets are digital assets using cryptography for secure transaction verification.
• Bitcoin, launched in 2009, remains the benchmark cryptocurrency.
• Investment vehicles for Bitcoin include mutual funds, hedge funds, futures, and options.
• Blockchain, Bitcoin’s underlying technology, ensures secure and transparent transaction records.
• Bitcoin provides potential diversification benefits, disrupting traditional financial and asset mechanisms.

Frequently Asked Questions (FAQs)

Q1: What is cryptocurrency?

A: Cryptocurrency is a digital or virtual asset designed to work as a medium of exchange using cryptography to secure the transactions and control the creation of new units.

Q2: How does Bitcoin function?

A: Bitcoin functions through blockchain technology, a decentralized ledger that records all transactions across the network.

Q3: What investment vehicles are available for Bitcoin?

A: Investment vehicles include mutual funds, hedge funds, futures, options, venture capital, and private equity.

Q4: Are there regulatory barriers for Bitcoin investment in North America?

A: Yes, regulatory barriers exist, and North American regulators have yet to approve Bitcoin ETFs.

Glossary

• Blockchain: A system in which a record of transactions made in Bitcoin or another cryptocurrency is maintained across several computers that are linked in a peer-to-peer network.
• Cryptography: The art of writing or solving codes to ensure secure communication.
• Cryptocurrency: A digital currency in which transactions are verified and records maintained by a decentralized system using cryptography.
• Digital Gold: A term used to describe Bitcoin’s value as a ‘store of value,’ similar to gold.

Conclusion

The expanding landscape of cryptocurrency offers numerous opportunities and challenges for investors. With its underlying technology and unique attributes, Bitcoin and other cryptocurrencies are poised to play a significant role in the future of finance and investment.