Why Canadians Should Invest a Fraction of Their Portfolio in Bitcoin

Investing in a relatively new asset class such as Bitcoin can be risky. The leading cryptocurrency’s extreme volatility is known to drive investors to sell at a significant loss. But Bitcoin’s high-risk profile comes with tremendous growth potential.

The top cryptocurrency is the best performing asset of the decade and I believe the strong uptrend will persist in the coming years as central banks adopt monetary policies that favour the growth of the largest digital token.

Here are three reasons why you should consider investing a fraction of your portfolio in Bitcoin.

The Federal Reserve’s Actions Are Bitcoin Rocket Fuel

The S&P 500 and S&P/TSX Composite Indexes are not the only assets that directly benefited from the Fed’s pursuit of unlimited money printing. The printing is of course happening to prop up the U.S. economy, and unintentionally the Canadian economy given that the U.S. is Canada’s biggest trading partner.

As the coronavirus pandemic started to rear its ugly head in March, the Federal Reserve responded by flooding the financial system with fresh liquidity. The Fed’s balance sheet skyrocketed from $4.24 trillion in March to over $7 trillion on June 15th, for a nearly 70% growth in three months. The sharp rise rivals the growth in the Fed’s balance sheet during the 2008 global financial crisis.

FED Assets
Source: Federal Reserve

While the Fed is banned by law to buy stocks, its other activities indirectly boost the stock market.

When the central bank prints money, they push the liquidity into the system by purchasing bonds and U.S. Treasuries from financial institutions such as mutual funds and hedge funds.

The Fed’s buying spree drives the price of bonds higher, compelling hedge funds and mutual funds to liquidate their bond holdings at a profit. With fresh capital on hand, these funds are required by their charters to invest the money in the stock market.

FRED Graph
Source: FRED

As you can see, the S&P 500’s impressive recovery is sparked by the Federal Reserve’s money-printing policy. The S&P 500 chart looks very similar to the S&P/TSX Composite Index for these very same reasons indirectly:

TSX Chart
Source: TradingView

What does it have to do with Bitcoin? The Fed-induced liquidity is finding its way to the king cryptocurrency. The chart below illustrates that Bitcoin also made a stellar recovery after the panic-induced selloff in March in tandem with America’s bellwether index.

Source: PlanB

As long as the Fed keeps the music playing, we can expect both Bitcoin, U.S. and Canadian stocks to rise.

Bitcoin Is the Fastest Horse 

Bitcoin is the fastest horse of the decade, bar none. Even after going through nauseating plunges, the largest cryptocurrency surged 9,000,000% from 2010 – 2020. In comparison, the S&P 500 grew 173% while the TSX soared 29% over the same stretch.

We expect Bitcoin to continue its unprecedented ascent as the asset dubbed as digital gold is likely nearing the end of its extended bear market. The prediction comes as Bitcoin’s supply plummets amid soaring demand to buy the cryptocurrency.

In May of this year, Bitcoin went through its third halving in history. The event reduced the rate of new supply entering circulation from 1,800 BTC per day to 900 BTC per day. In other words, the supply being absorbed by the market from miner block rewards is effectively halved.

Bitcoin Halving
Source: TradingView

On top of the halving, most people who own BTC prefer to hold on to their coins. Blockchain analysis firm Chainalysis reveals that 60% of the 18.6 million BTC that have entered circulation are being held for long-term investment. Another 20% are considered lost BTC – coins that will likely never be recovered as the user lost access to the wallet.

That means only 19% of all BTC that have entered circulation are being used for active trading.

The plunging BTC supply is being met with increasing interest from institutional investors. The smart money is getting BTC exposure through Grayscale’s Bitcoin Trust (GBTC) which is fully backed by real BTC. The digital asset management firm bought 18,910 BTC since the May 2020 halving, considering only 12,337 new BTC have entered circulation since the event.

Bitcoin Supply
Source: Kevin Rooke

The writings on the wall indicate that BTC is ripe for a new bull cycle, likely heralded by institutional investors. Analysts are already predicting Bitcoin to skyrocket to $100,000 by 2021, a 900% increase in a year. It’s unlikely that the SPX or the TSX will even double its value in 12 months.

Bitcoin Is Your Hedge Against Inflation 

The Federal Reserve’s unlimited money printing strategy comes with dire consequences for the mighty U.S. dollar, and by extension the Canadian Dollar. Those who hold cash will very likely see the value of their money dwindle as the Fed dilutes the economy with trillions of dollars.

Former Goldman Sachs executive Rob Koyfman says he sees the greenback on the verge of a major downtrend.

The Fed’s commitment to prolonged use of QE may represent a major turning point for the US Dollar. Over the past 30 years, the US Dollar has formed three distinct tops in 1985, 2000 and potentially in 2020. The current level of 97 is sitting on medium-trend uptrend support since 2010. A break below this trend line would confirm a major decline for the USD.

USD Koyfin
Source: Koyfin

Billionaire Paul Tudor Jones has also entered Bitcoin as a hedge against inflation.

Just since February, a global total of $3.9 trillion (6.6% of global GDP) has been magically created through quantitative easing. We are witnessing the Great Monetary Inflation (GMI) — an unprecedented expansion of every form of money unlike anything the developed world has ever seen. At the end of the day, the best profit-maximizing strategy is to own the fastest horse… If I am forced to forecast, my bet is it will be Bitcoin.

Tudor Jones allocated nearly 2% of his assets in BTC. His strategy is sound and something that others may consider following.

If BTC soars, as many signals indicate, Paul Tudor Jones isn’t left behind. Otherwise, the losses are negligible.

Disclaimer: The above should not be considered investment or trading advice. The author owns Bitcoin and other cryptocurrencies.

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