What Canadians Need to Know Before Investing in Crypto

(PIXABAY PHOTO)

Canada is gradually climbing the ladder of crypto-friendly countries in the world. The 2022 Financial System Review by the Bank of Canada shows that the adoption of crypto assets almost tripled between 2020 and 2022, growing from 5% to 13%.

With the growing awareness of cryptocurrencies, more Canadians may be looking for ways to invest their money in this digital asset class.

However, it is crucial to understand how these assets work and where the Canadian government stands on them. This article will highlight what Canadians need to know before buying and selling crypto by considering the current regulatory landscape and the risks associated with investing in cryptocurrency.

How Cryptocurrencies Work

Cryptocurrencies are decentralized networks that use cryptography to secure transactions and verify accounts. They were invented as open-source protocols so anyone can participate.

Their primary function is to enable peer-to-peer payments without relying on any financial institution or centralized authority. The network uses a public ledger called blockchain, which records all activity in real time. This allows users to send funds directly to each other without going through intermediaries like banks.

Bitcoin sits on top as the most popular cryptocurrency in Canada, but others like Ethereum, Binance Coin, Solana, and Litecoin are heavily invested in too. Any Canadian looking to invest in crypto should consider starting with these.

Where Do Cryptocurrencies Get Their Value?

The price of cryptocurrencies fluctuates based on supply and demand. The price of each coin increases as more people want to hold on to it and vice versa.

There are other variables capable of influencing the price of cryptocurrencies, including:

• Government regulations: Some governments regulate the purchase and sale of cryptocurrencies while others do not. For example, the regulations of the US Financial Crimes Enforcement Network (FinCEN) don’t view cryptocurrencies as legal tender but consider them as exchanges to be money transmitters.
• Market sentiment: Investors often follow trends when making investment decisions. Examples of such trends are the global shift towards DeFi, the incorporation of NFTs by MNCs, metaverse and GameFi, and so on.
• Media coverage: More media attention leads to greater awareness about a cryptocurrency. This may increase its popularity, drive demand, or crash its market value.

How Can Cryptocurrencies Be Used?

Cryptocurrencies provide different types of solutions for various industries. Primarily, crypto facilitates instant payment transfers around the world. It allows people to complete peer-to-peer transactions without going through banks or credit card companies.

Cryptocurrencies aim to provide an alternative to fiat currencies for purchasing goods and services online and in stores. This creates another option for consumers looking to spend money outside the mainstream economy.

Some businesses have started accepting cryptocurrencies as a form of payment. For example, Newegg.ca and many other Canadian retailers now accept cryptocurrencies as payment. Other merchants have Bitcoin ATMs where customers can withdraw their crypto funds anytime.

In fact, Canada has the second highest number of crypto ATMs after the United States. There were 2,528 crypto ATMs across the country as of August 16, 2021.

Where Does the Canadian Government Stand on Cryptocurrencies?

Thanks to their decentralized nature, there is still no all-encompassing legal framework governing cryptocurrencies anywhere in the world. However, most countries have taken steps toward regulating cryptocurrencies, with Canada being one of them.

Currently, as in the USA, Canada doesn’t recognize cryptocurrencies as legal tender. Following the government’s definition of legal tender, financial institutions in Canada cannot run or manage cryptocurrencies since they do not have any central authority’s support.

However, using cryptocurrencies to pay for goods and services in Canada is legal. It’s similar to how merchants accept US dollars for goods payments even though it’s not legal tender.

Since they’re considered commodities, citizens must also pay taxes on their crypto transactions. Nonetheless, Canadian law doesn’t permit the payment of taxes or completion of other government-related functions using cryptocurrencies.

In general, Canada has been proactive in its approach to cryptocurrencies. It primarily regulates crypto under securities law. In addition, Canada treats crypto exchanges and companies as money service businesses under its anti-money laundering laws. These laws help prevent criminals from exploiting cryptocurrencies to launder money while also protecting investors from fraudulent schemes.

To put it simply, regulations are still new and evolving. As such, we can expect more changes in the future.

Risks Involved with Investing in Cryptocurrencies?

Cryptocurrency has different use cases. Some see it as a long-term investment vehicle that appreciates over time. Others view it as a speculative instrument that will lose value instead.

Investing in cryptocurrency involves risks similar to those associated with any other investment. Investors must consider many factors before determining if a particular cryptocurrency is worth buying. Below we discuss several such factors.

Market Volatility

The Bank of Canada stated in May 2021 that price volatility was the main factor keeping crypto assets from becoming a commonly used payment method. According to the statement, sentiment has a more significant impact on market volatility than anything else, making it challenging to determine the right price for cryptocurrencies.

There’s always the chance that a coin may drop dramatically, leaving you with less than what you paid for it. For example, bitcoin prices fell by 50% by the summer of 2021, reaching $29,796 on July 19. Yet another crypto bull run occurred in September, pushing prices as high as $52,693 until a significant decline brought it to a closing price of $40,710 roughly two weeks later.

Susceptibility to Hacks

In 2021 alone, hackers stole over $4 billion in cryptocurrencies, with DeFi platforms most affected. Hackers exploited vulnerabilities in the code of decentralized finance applications to access their lending pools and transfer funds. 

Unfortunately, there’s little-to-no remedy for retrieving funds stolen through a hack or bug exploit. However, based on the continuous rapid adoption of cryptocurrencies across the globe, it is evident that the high probability of crypto platforms being hacked isn’t enough to deter investors.

Insolvency

Cryptocurrencies are still new, and there’s no telling which projects will stand the test of time. Many experts anticipate that crypto will see its own “dot-com” bubble burst, decreasing the number of crypto projects. 

The market has already seen some projects crash after reaching unsustainable levels, and a few others have declared bankruptcy. Recent cases include Celsius, Terra, and 3AC.

Is Cryptocurrency a Good Investment?

Some might argue that investing in crypto today is akin to gambling. If a project fails, investors have nothing to show for their investments.

However, this notion isn’t upheld by most. Cryptocurrencies offer many benefits and facilitate payments, trading, crypto arbitrage and other financial transactions.

They also serve as an alternative store of value. Investors can hold onto them instead of fiat currencies, and many view cryptocurrencies as better suited for long-term savings.

Moreover, investors can trade them on secondary markets. This allows investors to sell their coins at any moment without worrying about liquidity issues.

Although other variables still influence how risky cryptocurrencies are, their increasing adoption rate is a huge indicator of a rapidly maturing industry.

Summary

Canada has also been at the forefront of crypto adoption, with the first Bitcoin ETF trading on the Toronto Stock exchange in 2021.

Regulating money service businesses in Canada is also in line with the practices in most other nations. Any organization that exchanges or transfers virtual currency must register with FINTRAC and follow federal requirements to prevent money laundering and terrorism funding.

Canada’s approach toward crypto regulations makes the country attractive to cryptocurrency companies, traders, and portfolio managers. However, if you must trade cryptocurrencies in Canada, you should do so with caution.

Only trade with money you can afford to lose, and ensure you do your research before making any investment decisions.