The price of bitcoin soared by 1,800 per cent to almost US$20,000 in late 2017 before its epic bust. Following more wild swings, the price of the cryptocurrency has climbed to about US$10,000 – just days before an event that will slash new supply of bitcoin in half.
Decentralized crypto assets are still in their infancy and prone to hyper-volatility. Nonetheless, institutional and higher-net-worth investors are starting to pay attention to bitcoin for portfolio diversification.
“We look at it as digital gold,” says Arthur Salzer, chief executive officer and chief investment officer at Northland Wealth Management Inc., a family office and advisory firm in Markham, Ont. “It’s a valuable addition as an alternative asset like private equity, private real estate and private debt. We also own physical gold through a Canadian fund.”
Bitcoin is the leader with 69 per cent of the market value of all cryptocurrencies followed by ether – now trading at more than US$210 – with 9 per cent. First created in 2008, virtual bitcoin tokens are generated by miners using computers to solve complex math problems. They compete to add “blocks” of verified transactions to the public blockchain ledger and get rewarded with new bitcoins.
Around May 12, an event called the “halving” will take place in which miners’ bitcoin rewards will be reduced by 50 per cent. This event, which occurs every four years, controls inflation and will eventually limit bitcoin to 21 million in circulation. Bitcoin’s price surged after these events in 2012 and 2016.
This event should be a catalyst for a strong rally, says Mr. Salzer. “There’s a market cycle that has followed halvings. It creates interest and probably investment demand – be it real or emotional.”
When the price of bitcoin plunged after surging in the 12 to 18 months following previous halving events, “we would reduce our positions on the way up to get back to target exposures [for clients]. You need to constantly rebalance this asset,” he says.
Northland’s clients may have a 2.5- to 10-per-cent exposure to bitcoin depending on risk tolerance, Mr. Salzer says. They hold it through The Bitcoin Fund (QBTC.U-T), a closed-end fund run by Toronto-based digital asset manager 3iQ Corp. The firm bought the fund for its clients through a private placement for accredited investors. It went public in early April and now trades at a premium to net asset value.
As bitcoin has an asymmetric return profile – the upside potential is greater than downside – a tax-free savings account is the best place for this digital asset, Mr. Salzer says. “We are neutral on registered retirement saving plans given the tax consequences upon withdrawal.”
His outlook stems from spending 18 months researching the benefits and risks of bitcoin. He met with major U.S. investors and investment firms involved with bitcoin, including a unit of Fidelity Investments that was created in 2018 to offer cryptocurrency trading and custody services to institutional customers.
Bitcoin’s appeal is its low correlation to other assets in a portfolio, Mr. Salzer says. Still, its price sank below US$4,000 at one point on March 12, when stocks and gold were also roiled amid COVID-19 fears. Bitcoin’s crash was due partly to investors raising cash to meet margin calls, but its price has more than recovered, he says.