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What is Bitcoin? It’s a cryptocurrency, a digital token that some companies are beginning to accept instead of money. Many call it digital gold as it is considered to be the future alternative to paper currency, it is limited, and it needs to be mined. It has caught the attention of many companies, hedge funds, and billionaire investors.
People have contrasting views on Bitcoin and cryptocurrency. Traditional investors warned against holding crypto as an investment, given its high volatility, lack of regulation, and high exposure to scams. But the supporters believe it to be the future global currency, and some are attracted to it 88% surge year to date. If you are on the buying side and don’t know how, here is a complete guide to Bitcoin investing through the Tax-Free Savings Account (TFSA).
Can You Buy Bitcoin through the TFSA?
Complete Guide on How to Buy and Invest in Bitcoin using your TFSA in 2022
The answer is No. Firstly, you need a cryptocurrency trading account to buy Bitcoin and that account does not need your Social Insurance Number (SIN). Secondly, many of these trading platforms are slow and vulnerable to hackers. Even if not hacking, many users have lost Bitcoin because they forgot their passwords or accidentally deleted their wallets from their computers.
Lastly, Bitcoin is not accepted by regulators. This makes it impossible to hold Bitcoin in the TFSA that only allows securities trading on designated exchanges. But there are people getting exposure to the Bitcoin momentum through their TFSA. How?
How to Invest in Bitcoin through the TFSA?
Look at Bitcoin as commodities. There are commodities, like oil, which you can’t buy physically but can get exposure to their prices through oil ETFs and oil company stocks. Similarly, you can get exposure to Bitcoin through Bitcoin ETF and crypto mining company stocks.
Bitcoin ETF
On February 18, 2021, the Ontario Securities Commission (OSC) approved North America’s first Bitcoin ETF, The Purpose Bitcoin ETF (BTCC-B). Since then, two more Canadian ETFs have launched Evolve Bitcoin ETF (EBIT) and CI Galaxy Bitcoin ETF (BTCX-B). These ETFs open Bitcoin to a broader class of investors and hints the digital currency’s gradual acceptance as an investment asset.
Like any commodity ETF, BTCC-B buys Bitcoin and holds it in the Gemini Trust Company’s cold storage instead of the crypto exchange. The ETF charges a 1% management fee. You can buy the ETF at a NAV of $10.09 per unit at the time of writing and get exposure to the volatility in Bitcoin price. The ETF protects you from the risk of hacking.
You can buy and sell the ETF on the Toronto Stock Exchange during trading hours. This is its benefit and a drawback because Bitcoin trades 24 hours, and most of the volatility happens at night. But if you are looking at Bitcoin as a short-term investment and not for intra-day trading, the ETF is the best option. Since its launch, the BTCC-B has surged as much as 19.9%.
While ETFs give you direct exposure to Bitcoin price, mining companies give you indirect exposure. Bitcoin mining stocks are companies that have a setup, operating expenses, and profits. In a lifetime, you can only mine 21 million Bitcoins. To mine a Bitcoin, you need to solve complex mathematical problems which require high computing power.
With every passing day, mining is becoming more complex as Bitcoin is becoming scarcer. Mining companies use high-performance computing hardware to mine currency. They have to upgrade their equipment regularly to stay competitive. Like gold mining companies, these mining companies will only benefit when the Bitcoin price rises. As there is an operating cost involved, mining stocks are considerably more volatile than the ETF.
BitFarms (BITF) operates server farms that mine only Bitcoin, which makes it a high-risk stock. A better stock is HIVE Blockchain Technologies (HIVE), which mines Bitcoin and other cryptocurrencies. Year to date, stocks of BitFarms and HIVE surged 72.8% and 70.9%, respectively, in close tandem with Bitcoin price, which surged 88%.
If you invested $1,000 each in the above two crypto mining stocks at the start of the year, you would now have over $3,400 in your TFSA. As you invested through the TFSA, the $1,400 investment income will be tax-free.
Who Should Invest in Bitcoin?
The above returns might look enticing, but investing by only looking at rewards and not risks is a fool’s play. Remember, Bitcoin is a speculative investment, which means its price increase is not backed by fundamentals but people’s sentiments. Dogecoin moves on Elon Musk’s memes on Twitter. This makes any type of cryptocurrency impossible to predict.
If you are under the impression that Tesla invested US$1.5 billion in Bitcoin, note that it amounts to only 2.8% of its total assets. Elon Musk admitted in a tweet, “To be clear, I am not an investor, I am an engineer. I don’t even own any publicly traded stock besides Tesla.”
If cryptocurrency losses its popularity, it could fall drastically. If you look back at the 2017 crypto wave, Bitcoin price fell 81% from $23,790 on December 22, 2017, to $4,4954 on December 24, 2018. You never know when the current crypto wave will end, and your investment will lose value.
If the Bitcoin value falls over the weekend, you will have to wait till the trading hours to sell your Bitcoin ETF or mining stock to cap your losses. With this capital loss, you will also lose your TFSA contribution room.
Smart Investing Tip
Now that you know the risk and reward of Bitcoin, plan your TFSA portfolio wisely. Diversify your investments in growth and dividend stocks and keep only 1-2% of your portfolio in speculative assets like Bitcoin. If your TFSA portfolio is worth $10,000, invest around $150. This way, even if you lose the entire $150 from your speculative bets, you can recoup the loss from your income from other investments.
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