The seemingly unstoppable rise of bitcoin continued Tuesday with the cost of a single unit of the digital currency rising above $50,000 US for the first time.
The same bitcoin just one year ago would have cost you $10,000 US. The price is up almost 200 per cent in the last three months alone.
Bitcoin is rallying as more companies signal the volatile digital currency could eventually gain widespread acceptance as a means of payment. The vast majority of those who have acquired bitcoin have treated it as a commodity, like gold, with few places accepting it in exchange for goods or services.
Companies have been leery because of bitcoin’s volatility and its use by parties who want to avoid the traditional banking system for a myriad of reasons.
Last Monday, however, the electric car company Tesla sent a tremor through the digital currency markets, saying that it was buying $1.5 billion US in bitcoin as part of a new investment strategy, and that it would soon be accepting bitcoin in exchange for its cars.
Then Blue Ridge Bank of Charlottesville, Va., said that it would become the first commercial bank to provide access to bitcoin at its branches. The regional bank said Wednesday that cardholders can purchase and redeem bitcoin at 19 of its ATMs. BNY Mellon, the oldest bank in the U.S., followed a day later, saying it would include digital currencies in the services it provides to clients.
‘Not going to happen overnight’
While most expect a slow evolution toward widespread usage of bitcoins as currency, Richard Lyons, a finance professor at the University of California at Berkeley, says it’s inevitable. Lyons predicts bitcoin and other digital currencies “will become transactional currencies increasingly over the next five years. It’s not going to happen overnight,” he said.
Lee Reiners, who teaches fintech and cryptocurrency courses at Duke University School of Law, said BNY Mellon’s move makes sense because “there are now numerous high-net-worth individuals and investment funds embracing crypto as an asset class to be added to their portfolio.”
But Reiners believes companies will remain hesitant to accept bitcoin for payment because of its volatility.
“If you were a merchant, why would you accept payment in an asset that could be worth 20 per cent less a day after you receive it?” Reiners said in an email.
Investors will have to grapple with that volatility as well. The price of bitcoin has soared and dipped since its debut on the futures market in 2017. Those fluctuations, analysts warn, could wreak havoc on a company’s bottom line and deter investors.
Tesla warns of volatility
Assuming Tesla bought bitcoin at the volume weighted average price of $34,445 US in January, the company is sitting on a gain of about 38 per cent with its investment. But in the regulatory announcement unveiling the investment, Tesla warned about the volatility of bitcoin, its reliance on technology for use and lack of a centralized issuer, such as a government.
“While we intend to take all reasonable measures to secure any digital assets, if such threats are realized or the measures or controls we create or implement to secure our digital assets fail, it could result in a partial or total misappropriation or loss of our digital assets, and our financial condition and operating results may be harmed,” Tesla said in the filing.
“Tesla is going to have to be very careful and comprehensive in accounting for its bitcoin investment on its books,” said Anthony Michael Sabino, a professor of law, at St. John’s University. “Like any other financial asset other than actual cash, it might fluctuate.”
Canadian ETF market
Bitcoin-based exchange traded funds are getting the go-ahead from Canadian regulators, creating a path for a fund structure that investment managers say is unique in the industry.
Toronto-based Purpose Investments says its bitcoin ETF will likely start trading this week under the symbol “BTCC,” after the fund worked with regulators to make sure it could create something that follows the rules for both the ETF market and the digital asset industry.
An Ontario Securities Commission spokesperson says the regulator finished reviewing Purpose Investments’ final plan to offer securities last Thursday and gave the fund a receipt that makes it a reporting issuer in Ontario.
After Purpose Investments announced the milestone, another Canadian fund, 3iQ, said it also received preliminary receipts for a bitcoin ETF in all of the Canadian provinces and territories except for Quebec.
Both funds claim to be “physical” bitcoin ETFs, setting them apart from some of the other cryptocurrency investments out there, such as the bitcoin futures that trade on the Chicago Mercantile Exchange.
‘Physical,’ not derivative
Purpose Investments Chief Investment Officer Greg Taylor says the fund is different from a derivative or futures contract, as Purpose Investments will buy bitcoin every time someone puts money into the ETF.
Taylor says Purpose Investments will also store the bitcoin codes themselves — not on the internet — using a process called “cold storage.” OSC has described cold storage as “a computer with no access to a network” that is less vulnerable to hacking.
Purpose Investments says the end result of these bitcoin ETFs is that investors will hold actual bitcoin in their portfolios but can buy and sell it similarly to buying or selling a stock.
“The risk is for traditional investors that you have to open up a trading account to buy bitcoin and you’re in self-custody — meaning you’re going to get the code and password for that coin. And you’re responsible for doing that,” said Taylor. “With the ETF structure, it’s going to be easier as we’ll do that with our custodian.”
CIBC Mellon is working as a fund administrator for Purpose Investments’ bitcoin ETF, as the firm looks for ways to meet rising demand for cryptocurrencies.
Ronald Landry, who runs Canadian ETF services for CIBC Mellon, says it is working on getting more cryptocurrency services up and running in Canada.
3iQ chief executive Fred Pye says a physical bitcoin ETF is the natural progression from its other investment vehicles, which include a publicly listed bitcoin investment fund and a fund based on the cryptocurrency Ether.