Some Canadian investors hold tight to bitcoin despite price plunge

For a product frequently touted as “digital gold” and a hedge against a weakening U.S. dollar, bitcoin’s performance has stood in stark contrast to the real thing. While gold has lost some of its lustre after hitting a record high above US$5,600 per ounce in late January, it is still up 70 per cent over its price a year ago.

The world’s largest cryptocurrency, which hit its own record above US$126,000 in early October, has shed more than 40 per cent of its U.S. dollar value since last February. Last week, bitcoin suffered its biggest daily fall since November, 2022, erasing all of its gains since the election of U.S. President Donald Trump.

Flows into Canadian-listed cryptocurrency exchange-traded funds indicate that, for some Canadians, the chance of a return to outsized gains remains a major draw. But experts say investors should remain wary of significant risks, and they warn that cryptocurrencies are not appropriate for everyone.

“The allocation really needs to be tempered by the investor’s tolerance and capacity for risk,” said Geraldo Ferreira, head of investment products and manager oversight at CI Global Asset Management.

Bitcoin rallies, tops US$70,000 as risk assets stabilize

As a “nascent” asset class, cryptocurrencies have return potential, but there is a “tremendous amount” of volatility, he said. CI Global provides a number of cryptocurrency ETFs, as well as asset allocation ETFs that offer exposure to cryptocurrencies.

Volatility hasn’t kept investors away. In a note to clients, TD Securities strategists Andres Rincon and Casey Yang said that Canadian dollar-listed crypto ETFs overcame the poor performance of digital assets to record inflows of $700-million last year. And even as the price of cryptocurrencies such as ether and bitcoin dropped, Canadian crypto ETFs recorded modest inflows of $17-million in January, while their U.S. counterparts saw outflows of US$1.4-billion.

But the sharp slump in the price of bitcoin on Feb. 5 prompted doubts even among long-time investors in alternative assets. “You have to ask yourself, ‘Is it over for bitcoin?’,” Anthony Scaramucci, founder of U.S. alternative investment firm SkyBridge Capital, told CNBC.

In a note to clients last week, Alex Saunders, head of quantitative global macro and asset allocation at Citi Research, highlighted waning flows into U.S. crypto ETFs and referred to previous research that warned of a deeper market freeze as bitcoin traded below the “important” US$70,000 level.

“The current decline of 40 per cent from its all-time high is approaching a level beyond which crypto bear markets have historically been multiyear affairs with significant drawdowns,” he said.

Leo Weese, technical content lead at Lightning Labs, which has developed a bitcoin-based payment protocol, admitted that use of bitcoin has lagged behind the cryptocurrency community’s expectations. Mr. Weese said he knows long-time holders who sold bitcoin over the past year based on a judgment that its price had “topped out” given current levels of adoption.

Worries about its continued viability because of developments such as quantum computing, which some analysts fear could undermine the security of bitcoin wallets, also weighed on sentiment, he said, though he added that he believes those concerns are overblown.

For Matt Lotocky, a financial planner at the Dixon Davis Group in Victoria, a more immediate concern about cryptocurrencies is their unpredictability.

“It’s very hard to understand the role that bitcoin or crypto has in a financial plan,” said Mr. Lotocky. “You can’t predict it. And as a financial planner first, I like that predictability.”

“I’m going to say you need $2.5-million by the time you retire at 65 to spend $150,000 a year. And I know that you can do that by saving $3,000 a month and investing in an 80/20 portfolio,” he said. “Why would we introduce the element of risk and uncertainty of cryptocurrency … [when] we can get there with the tools that we understand?”

Mr. Ferreira of CI Global acknowledged that not all investors want exposure to digital assets. But he said that for those with the appetite and ability to take risk, the firm’s modelling showed even a small exposure to cryptocurrency had the potential to improve a portfolio’s risk-adjusted returns over time.

Other investors may find they already have all the exposure they need.

“In a balanced and diversified broad market portfolio, there are existing companies … that are exposing themselves at the company level to crypto,” said Matthew Learning, lead planner at Mountainview Financial Planning in Vancouver.

“So, you do have a certain amount of exposure sprinkled in through your existing portfolio.”