Different Makes a Difference

The Odlum Brown Research Blog

Show Me the Money

By Fai Lee CGA, CFA, Equity Analyst
Friday, December 01, 2017

bitcoin

While discussing the merits of bitcoin, I was recently asked whether I would like to be paid in bitcoins or Canadian dollars. It’s a good question and brings into focus the unique characteristics of bitcoin and the role of money.

Bitcoin is a digital currency created by computers running software designed to solve mathematical equations. It is traded electronically with very low transaction fees. Unlike more traditional currencies such as the Canadian dollar, U.S. dollar or euro, bitcoin is not printed or controlled by the central banks of the world. By design, there is a limit on the total number of bitcoins that can be produced. Is it really money though?

Economists define money as something that is a:

  • store of value – money can be saved and used at a later point in time
  • medium of exchange – money can be used to buy and sell things
  • unit of account – money provides a common base for pricing

The Canadian dollar and other traditional currencies possess all three characteristics, but does bitcoin?

As a store of value, one can save bitcoins and use them at a later point in time. However, the value of bitcoins is largely determined by how much buyers are willing to pay and this value has been extremely volatile. In the last 12 months, the value of one bitcoin has gone from about US$750 to over US$10,000 currently. Within the last three days, it has fluctuated between US$9,600 and US$11,500.

As a medium of exchange, bitcoin can be used to buy and sell some things directly such as online travel, Microsoft software, computer parts and Subway sandwiches. The list of vendors who are willing to accept bitcoin is increasing but it is still far from being widely adopted.    

As a unit of account, whether bitcoin provides a common base for prices is debatable. The extreme volatility of the value of bitcoin compared to traditional currencies makes pricing items solely in bitcoins without any reference to other currencies difficult. In November 2013, Adam Welsh shared on YouTube his experience of buying a Subway sandwich for 0.04 bitcoins or the equivalent of US$12.35. If Subway maintained the price of the sandwich at 0.04 bitcoins, the sandwich would cost over US$400 today!

Without more stability in the value of bitcoin and greater acceptance as a medium of exchange, I think I’ll stick to being paid in Canadian dollars.


Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important!

Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research here.

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information's accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice.

No part of this publication may be reproduced without the express written consent of Odlum Brown Limited. Odlum Brown Limited is a Member-Canadian Investor Protection Fund.


Subscribe to Our Research Blog

Receive new postings by email