With Trump and his (supposedly) pro-cryptocurrency policies poised to move into the White House, Bitcoin’s market capitalization surged surpassing the total value of silver globally, reaching $1.7 trillion.  This milestone is nothing short of remarkable, especially when considering the relatively short time Bitcoin has been in existence and the fact that surveys show a significant lack of understanding towards it.  In fact, according to a recent Ontario Securities Commission study, only about half of Canadian investors could accurately define cryptocurrency assets and a mere 4% of them currently own any cryptocurrency related assets. This raises important questions: In an increasingly digital world, is society ready to adopt digital currencies? And are investors prepared to engage with digital assets?

Launched in 2009 by an anonymous creator known as Satoshi Nakamoto, Bitcoin is arguably the most popular of the countless cryptocurrencies in circulation and by far the largest by market capitalization. Built on blockchain technology, which effectively operates as a digital ledger that records transactions across a distributed network of computers. This ledger is designed to be transparent, immutable, and tamper-resistant, ensuring secure and reliable transaction records without reliance on a central authority.

Each “block” in the blockchain contains data — for Bitcoin, a record of a transfer between parties. Blocks are linked in a chronological sequence, forming a continuous, digital “chain.”  Each block is linked to the previous one, while the “crypto” in cryptocurrency refers to cryptographic techniques that ensure transactions are securely and permanently recorded on this ledger.  This structure makes it nearly impossible to alter past records without changing every subsequent block, in doing so would require enormous computational power.

This secure, independent structure is what has attracted users seeking an alternative to centralized banking systems.  In traditional finance, central authorities like banks or payment providers maintain the transaction ledger. However, blockchain eliminates the need for intermediaries by creating a decentralized, transparent system in which all users share access to the same ledger.  Transactions are validated through network consensus mechanisms rather than by a single certified authority, ensuring trust and security without central oversight.

According to the original whitepaper that helped set out the basic structure of the network, Bitcoin was originally designed to be a decentralized digital currency.  A way for people to transact directly, by-passing traditional financial institutions without the need or interference from public and private institutions.  However, while Bitcoin fulfills aspects of the definition of a currency, it clearly fails in others.  Like that of a currency, it is employed as a medium of exchange as well as serving as a unit of account, with the value expressed in bitcoins.  However, given that it is not backed by a government or as legal tender and its use is completely voluntary, its adoption is limited compared to traditional currencies like the dollar or euro.

Bitcoin is also portable and divisible, in other words, easy to transport and divisive into smaller units enabling both large and small transactions.  For example, a $20 bill can be broken down into smaller coins and bills.  In fact, due to its digital nature, Bitcoin is much more divisible than fiat currencies, and can be divided up to eight decimal places, with constituent units called Satoshi’s.  With regards to transport, one’s Bitcoin can be accessed via an internet connection or carried in ‘cold storage’ a non-connected medium.

However, one of Bitcoin’s more precarious qualities as a currency is its reliability as a store of value.  Traditionally, a currency is expected to maintain a relatively stable value over time for the purposes of saving and spending with some degree of predictability in the future.  Bitcoin, when valued in commonly used currencies, has shown significant volatility. For example, in the past year, Bitcoin’s price in USD rose by over 100%.  In the past five years, it has surged by more than 900%.  While this might suggest a consistent upward trend, the reality is more varied.  After reaching an all-time high of approximately $64,000 USD in November 2021, Bitcoin’s value declined to under $17,000 over the course of the following twelve months. For those whose investment portfolio had a mandate of a moderate amount of risk, they could not have anything to do with an asset that experienced such price fluctuations.

Although originally designed as a currency, Bitcoin’s volatility challenges its effectiveness as a stable store of value.  However, this same volatility offers potential for significant returns.  Coupled with its scarcity, immutability and its role as a portfolio diversifier make it a compelling investment for some.

Bitcoin has often been likened to ‘digital gold’, leading some to view it as an effective hedge against inflation.  Its decentralized system, governed by an immutable computer code rather than influenced by human emotions, biases, or political factors ensures a fixed supply that cannot be altered.  Unlike traditional currencies, which are subject to government monetary policies and can experience inflation due to increased circulation, Bitcoin’s implicit scarcity gives it appeal as a store of value.  This has led some to see Bitcoin as a valuable portfolio diversifier and a hedge not only against inflation but also against economic and political uncertainty, as its value may rise in response to instability in traditional financial systems.

However, as with any investment, Bitcoin comes with its own risks, unique and otherwise, which users and/or investors need to carefully consider.  Given that Bitcoin and cryptocurrencies are a relatively new phenomenon, regulatory uncertainties continue to persist leaving Bitcoin in a state of legal ambiguity. Some governments have yet to introduce regulations to address issues like money laundering, fraud and consumer protection.  Additionally, tax regulations surrounding transactions are complex given their different use cases i.e. asset or currency.

The reality is, Bitcoin is the by-product of relatively recent, yet rapidly evolving technological advancements, making it susceptible to changes that could diminish its relevance just as quickly as its rise to prominence.  Finally, its shadowy beginnings do not inspire confidence, and it remains, at present, a more speculative asset or currency compared to more established assets.  While Bitcoin may have a place in some portfolios, it is at present better suited for those who are able to tolerate significant risk and volatility.