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Bitcoin and Cryptocurrency: Long-term Potential or Short-term Buzz

EDJ-10954-A (Bitcoin)

Bitcoin is powered by a promising new technology, but many uncertainties remain

The meteoric rise in the price of Bitcoin, which represents more than half of the nearly $500 billion cryptocurrency market, has dominated headlines recently. But the price of Bitcoin and other cryptocurrencies has been extremely volatile due to significant uncertainties, including:

  • Long-term supply-and-demand dynamics
  • Potential impacts from government policies
  • The question of which cryptocurrency, if any, will survive over time

Blockchain: the technology behind Bitcoin

Bitcoin is the product of a technology called Blockchain. The original intent of Blockchain was to enable peer-to-peer digital payments that do not require a trusted third party, such as a financial institution. The problem Blockchain solves is assuring the recipient of a digital asset that the asset is wholly transferred (as opposed to copied and then transferred), thereby eliminating the possibility of digital double-spending. Blockchain thus removes the need for a third party to verify peer-to-peer digital transactions.

How Blockchain works

Blockchain is a digital ledger, or record, of transactions managed by a decentralized network of computers. For ledger entries to be successfully added to the Blockchain, all computers on the network must agree that the entries are accurate. If they all agree, the ledger entries are added and Bitcoin is issued as a payment. In this way, Bitcoin serves as an incentive to add valid transactions to the ledger, removing the need for a central trust authority.

Blockchain potential applications

Blockchain allows for the exchange of digital value directly and securely. Thus, the technology has many potential applications, including:

  • regulatory recordkeeping of any sort (health history, land title, etc.)
  • financial transactions or transfers of value (payments, loans, etc.)
  • personal control of online identity
  • supply-chain optimization
  • consumer-loyalty programs

Risks to Blockchain and cryptocurrencies

While Blockchain solves an important technology problem, the value of any given cryptocurrency remains highly uncertain. Cryptocurrencies such as Bitcoin, Ethereum and Litecoin have all exhibited significant price fluctuations due to these high levels of uncertainty.

In addition, cryptocurrencies are not common stocks of companies and do not trade on stock exchanges. Unlike an investment in a stock or mutual fund, there are no underlying fundamentals (cash flows, profits, tangible assets, etc.) to support the valuation. Edward Jones does not offer a way to purchase or hold bitcoin.

Canadian Securities position on cryptocurrencies

According to the CBC, Canadian Securities regulators are taking a closer look at the technology companies that offer digital currencies such as bitcoin to make sure they follow the rules.

Canadian Securities Chairman Louis Morisset noted:

"We are open to innovation but we need to ensure investor protection will be there."

Is Bitcoin a bubble in the making?

Many investors are questioning whether Bitcoin and other cryptocurrencies are the latest asset bubble at risk of bursting. While no one knows for certain, we do know that the over 1600% price increase year-to-date surpasses many other previous bubbles, such as the dot-com bubble of the late 1990s, and the recent U.S. housing market bubble. While predicting the near-term, or even long-term, direction of Bitcoin is impossible, we believe the one certainty is that extreme volatility is likely to continue.

What is Edward Jones' guidance?

While we believe Blockchain technology has significant promise, we view any investments in cryptocurrencies as highly speculative. We recommend following time-tested investment principles and - not letting the "fear of missing out" negatively impact your long-term investment strategy.
Remember to always do your homework before deciding on any investment, including emerging technologies and markets. Working together with your financial advisor can help you to determine whether a particular investment is suitable for your portfolio.

Important Information:

This report does not take into account your particular investment profile and is not intended as an express recommendation to purchase, hold or sell particular securities, financial instruments or strategies. You should contact your Edward Jones Financial Advisor before acting upon any Edward Jones Research Rating referenced.

All investment decisions need to take into consideration individuals' unique circumstances such as risk tolerance, taxes, asset allocation and diversification.

This publication is based on information believed reliable but not guaranteed. The foregoing is for INFORMATION ONLY. Additional information is available on request. Past performance is no guarantee of future results.

Diversification does not guarantee a profit or protect against loss in declining markets.

Special risks are inherent to international investing including those related to currency fluctuations, foreign political and economic events.

Dividends can be increased, decreased or eliminated at any time without notice.

An index is not managed and is unavailable for direct investment.

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