Canadian MoneySaver - Crash Course in Crypto

MARCH/APRIL 2023

EDITOR-IN-CHIEF: Lana Sanichar

EDITOR: Peter Hodson

CONTRIBUTING EDITORS:

Ed Arbuckle, Isabelle Beaudoin, John De Goey, Donald Dony, David Ensor, Derek Foster, Benj Gallander, Janet Gray, Robert Keats, Ken Kivenko, Marie-Josée Loiselle, Moez Mahrez, Ryan Modesto, Richard Morrison, Caroline Nalbantoglu, Brian Quinlan, Wynn Quon, Rino Racanelli, Barkha Rani, Colin Ritchie, Norm Rothery, Rita Silvan, Allan Small, Barbara Stewart, Kornel Szrejber, Brian Tang, Becky Wong.

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MARCH/APRIL 2023 Volume 42, Number 6

If you have been even a casual reader of MoneySaver in the past few years, then you should know at least the basics of dollar cost averaging (DCA).

Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. By using dollar-cost averaging, investors may lower their average cost per share and reduce the impact of volatility on their portfolios. In effect, this strategy eliminates the effort required to attempt to time the market to buy at the best prices.

It is amazing how DCA works in real life. When I was a fund manager earlier this century, we were encouraged to put money into our own funds. In fact, at some of the investment companies I worked at we were not even allowed to have a personal stock account. So, every month part of my pay cheque simply went into units of the fund I was managing. Then, along came the 2008/2009 Great Financial Crisis. Stocks plummeted, companies went bankrupt, and people lost their homes. Yet, still, every month, I was buying. In 2010, when it was safe to come out from under my desk, I was surprised at how unscathed my portfolio was. We had just come through a giant market crisis, and my portfolio was in good shape. Why? Because I kept buying constantly. My $600 per paycheque bought more and more fund units each month as the market declined.

So, I did some math on 2022, which was another horrible year in the market. Suppose an investor bought $1,000 worth of SPY, the S&P 500 Index ETF, every month on the 15th, or if the 15th was a weekend or holiday, then the 14th. For this exercise we will assume there were no commission charges, which is true at several brokerages these days, especially for ETFs. With a DCA strategy last year, an investor would have lost 5.9% for the year. But that compares to a 19.5% loss for the market overall. Certainly a much better performance. Even better, those extra units bought when the market was down really help when the market recovers, as it did in the first six weeks of 2023. Today, at the time of writing, the 2022 DCA strategy would see an investor already UP about 1% in total. Think about this. A DCA strategy in the third-worst year in 30 years is already in positive territory, less than two months into the year.

If that doesn't convince you that the strategy works, then nothing will. Perhaps it's time to implement regular buying and forget about timing the market.

Peter Hodson, CFA

MoneySaver DIVIDEND & COMPANY NEWS

In this column we list recent news, events, dividend income news and any other relevant information for MoneySavers. News items are those received after our last publication date. Please go to https://www.5iresearch.ca/dividend-updates for a more comprehensive list of dividend updates.

■ Brookfield Infrastructure (BIP.UN) raises distribution by 6%.

■ Canadian National Railway (CNR) raises dividend 7.8%.

■ Metro (MRU) raises dividend 10%.

■ Richelieu Hardware (RCH) raises dividend by 15%.

■ Birchcliff Energy (BIR) increases dividend 10-fold from 2 cents to 20 cents.

■ MTY Food Group (MTY) raises dividend by 19%.

■ Allied Properties (AP.UN) raises distribution 2.9%.

■ Surge Energy (SGY) confirms 14% dividend increase for February.

■ Canadian Utilities (CU) raises dividend by 1%.

Canadian MoneySaver MODEL ETF PORTFOLIO

date: October 18, 2013

Prices are at market close on February 2, 2023.

Individual prices are in USD$. Portfolio values, $Gain/(Loss), % Gain/(Loss), % Annualized all reflect USD$ values are converted to CAD$.

Returns include foreign exchange gains/losses

Current notes: None.

88.00%

7.02%

Other notes: Keep in mind all investors are different. This portfolio is designed as a guide in setting up your own personal portfolio. Unique considerations and adjustments need to be made to reflect your personal situation. Please perform your own due diligence before making investment decisions. For use by Canadian MoneySaver subscribers only.

Analysts do not own a financial or other interest in any of the above securities. Past performance is not an indicator of future performance.

Not for redistribution. Please direct portfolio questions to moneyinfo@canadianmoneysaver.ca.

Crypto Crash Course With Chris Part

1 – Crypto Networks

Chris White

Crypto's Volatility And Recent Events

The crypto space is highly volatile, to say the least, and recently there has been a lot of negative press and exposed bad actors in that space. Despite its volatility and prolific share of scams, there is a highly motivated subset of builders and programmers that continue to move aspects of the space forward into a more productive future. I am sure we have all heard of the various threeletter acronyms of FTX, SBX, 3AC, and others that have made waves in the news cycles and represent the more nefarious side of crypto. While these players had hidden agendas and motivations of their own, beneath the news cycle surface, there is an extremely vibrant and active community aside from those bad actors that are passionate about how crypto can revolutionize and disrupt modern-day industries.

Addressing Common Misconceptions About “Crypto”

Crypto is a short form for cryptocurrencies, which is a slight misnomer in that while these “coins” can be used as currency, or a medium of exchange, their makeup is really that of a network. As of writing, there are roughly 12,425 cryptocurrencies in existence, and arguably less than the top 100 have true utility and fundamental use cases. For this article, we are going to ignore the multitude of crypto coins that have emerged for no other purpose than pure speculation. For those uninvolved with crypto, it is easy to only view crypto as just coins, but when we peel back the layers behind viewing them as just tokens, these are protocols and networks with functionalities well beyond simply a medium of exchange.

What the Crypto Landscape Looks Like Today

There are a few well-known and recognizable cryptos that exist today, and then there are a plethora of coins that no one has really heard of. For this article, let's take a look at and focus on the top ten cryptos by market cap at the top of the next page.

Bitcoin ranks number one, with the largest market cap of all 12,425 coins at $442.7 billion as of writing. Ethereum (ETH) stands second at a $190.7 billion market cap, and Tether, USD Coin, and Binance USD are all “stablecoins”, which are pegged 1:1 with the US dollar. BNB, Solana, and Cardano are smart-contract platforms similar to Ethereum, XRP attempts to solve international money transfers, and I'm sure we have all heard of Dogecoin. Bitcoin and Ethereum clearly stand out against their competitors in size, and the activity on these platforms clearly validates this.

The Crypto Framework And Basis Behind Their Networks

In this section, we are going to go through the framework behind most cryptocurrencies and, along with it, some of the popular buzzwords.

Blockchain

All cryptos are underpinned by the “blockchain” technology. This is the technology that enables crypto to be a public ledger of transactions. When we think of the banking system, it operates as a centralized private ledger of transactions. Transactions are sent to a bank, which is owned and operated by a corporation in a specific location, and its systems record and approve transactions in a private (not visible to the public) ledger. On the

Source: Coingecko.com

other hand, blockchain technology operates with a public digital ledger that can be verified by anyone in the world, where transactions are sent to the network, bundled into what is known as “blocks”, and these blocks are approved and recorded by miners. The term blockchain becomes

much less intimidating when we visualize that it is a chain of blocks (bundles of transactions). Only one block of transactions can be verified at a time, and as blocks are verified by miners, they are sealed and locked into the blockchain's history forever and cannot be altered.

Source: 5i Research

Miners

Crypto miners are essentially the security of the network. Crypto miners compete against each other to complete a complex math problem that will solve the current block of transactions. Once that block is solved, the winning miner is rewarded in crypto (for the bitcoin network, they receive bitcoin, etc.). This is how crypto networks are secured. Crypto miners are incentivized to be honest in approving transactions on the network and are rewarded for that honesty, similar to how a bank employee is honest in verifying transactions and is rewarded by their salary. The difference is that crypto miners operate across the world, are not employed or have any contractions to the network, and largely they do not know each others' identities. (See chart below.)

Decentralization

The combination of blockchain technology and miners being incentivized by the network’s coin (BTC, ETH, etc.) is what allows crypto networks to be referred to as “decentralized”. There is no central authority, no CEO, no headquarters, and no single entity in charge—it is a network of individuals using the crypto protocol to send and receive coins and miners that validate the network, which have no ties or connections to each other and are incentivized to act fairly and truthfully.

Crypto Exchanges

Crypto exchanges are often what cause individuals to conflate the security, robustness, and integrity of a decentralized blockchain and the actions performed by some of the bad actors of centralized crypto exchanges. Crypto networks operate as a layer on top of the internet, with their own decentralized qualities. The problem is that there are only two ways to acquire crypto: by being a miner and being rewarded for solving blocks or by transferring fiat currency to a centralized exchange and purchasing crypto. The only way to convert fiat currency into crypto is through an exchange, and exchanges, unlike crypto networks, are centralized. Crypto exchanges have a CEO, headquarters, employees, dedicated servers, and so forth, and this makes them vulnerable to attacks, malfeasance, and fraud. The silver lining is that once individuals have exchanged fiat currency for crypto using an exchange, they can then transfer that crypto off the exchange and into their own self-custodial wallet.

Crypto Wallet

Crypto wallets are self-explanatory—they are a wallet created on a crypto network designed to hold cryptocurrencies. If an individual transfers crypto offexchange and into their own crypto wallet, this is known as self-custody since no other individual, corporation, or entity has access to that wallet. It is solely in the hands of the individual. This is an excellent feature of crypto networks to ensure that the individual has sole ownership, and no other entity can take that from them, but it also places the onus of responsibility entirely on the individual. If the password is lost, stolen, or given away, the cryptocurrencies in that wallet are at risk.

(See chart on next page.)

Source: 5i Research

Source: 5i Research

Permissionless

Aside from the centralized nature and regulations of crypto exchanges, crypto networks can be used by anyone in the world. No sign-up is required to use crypto networks. It is non-partisan. There are no special treatments or preferences between users. All users are treated equally by the network, and it does not adjust fees up or down depending on who uses the network or where it is being used.

What Makes the Top Crypto Have Value?

Each crypto network is unique and offers its own utility, but we feel most of these differences can be seen between the top two networks: Bitcoin and Ethereum.

The Bitcoin network's value proposition is that it is currently the largest crypto network, which is arguably

the most decentralized (most number of miners) and has first-mover advantages. Bitcoin's unique feature is that there will only be 21 million bitcoin available. There is a hard-cap supply of 21 million that is expected to be achieved sometime 100 years from now, and currently, there are roughly 19 million in existence. This may sound like a lot, but considering the supply will never go beyond 21 million, that means only roughly 0.003 bitcoin per person on the planet or 0.37 bitcoin per millionaire on the planet.

Ethereum also operates on blockchain technology like Bitcoin. However, its supply is not capped like Bitcoin’s is, but rather its unique feature is in the applications that can be built on top of the network. Applications include Decentralized Finance (DeFi), NFTs, decentralized games and social applications.

The Conclusion is Not So Cryptic

Once we understand the premise and underlying principles behind crypto networks, the idea becomes much less arcane. These are networks that use the coins issued on their platforms to incentivize miners to act in good faith and secure transactions performed between individuals. Crypto networks are ledgers of financial transactions, just like a traditional bank. However, its key distinctions are that the transactions are fully public and transparent, the network is secured by many individuals (miners) and cannot be altered by one single entity, and anyone can use the network without restrictions.

Chris White, CFA, Analyst for 5i Research Inc.

Disclosure: The presenter has a financial or other interest in Bitcoin and Ethereum

Teaching Finances To Young People

Ellen Roseman

When my brothers and I were young, my grandmother gave each of us a single share of Bell Canada for birthdays and graduation gifts. We were excited to receive the telephone company’s shares, then trading in the range of $40 to $50 each.

But the importance of investing for the long-term was lost on me. If I had learned that lesson, I wouldn’t have cashed in my 25 Bell shares before I turned 25.

Here’s what I wrote about my shortsightedness in a Toronto Star article in 2011.

“The proceeds helped cover what seemed like urgent needs at the time. Don’t ask me. I don’t remember. Typical of many young people, I didn’t think ahead. I believed in the power of now. That was my first big money mistake, liquidating a longterm asset to satisfy a short-term spending need.”

So, what did my three brothers do with their grandmother’s gift? My middle brother Howard cashed in his shares when he and his wife bought their first house in Ottawa in 1986. They managed to pay off their mortgage in three years.

My brother Michael, born nine years after me, drew a blank when asked what he did with his Bell shares. He can’t remember getting any as gifts. My grandmother might have stopped buying shares for the newest arrival once we had four kids in the family.

My brother Doug, two years younger than I am, was the only one who held onto his Bell (later BCE) shares. “They have a certain sentimental value,” he said.

When we compared notes in early 2011, he had a total of 137 shares. That was a result of BCE distributing units of Bell Aliant (its operating company) to shareholders and consolidating its shares in 2006.

If Doug had sold his 25 Bell shares in 1968, as I did, he would have netted $1,125. Did he make money by holding onto them? Not when you consider the time value of money. These 25 shares would have been worth $7,250 in 2011, using inflation-adjusted dollars, about $2,000 more than the value of his BCE investment in 2011. Not an eye-popping gain over several decades.

He’d have done better reinvesting his quarterly BCE dividends and earning income on income, otherwise known as compounding. But he let the cash accumulate in a brokerage account and didn’t join Bell’s dividend reinvestment plan, launched in 1976. He didn’t want to track fractions of shares for tax purposes.

Despite my youthful indiscretion in dumping shares to quench a thirst for momentary pleasure, I grew up to be a buy-and-hold investor managing my own accounts. I’ve been teaching a course in investing for beginners at University of Toronto for almost 20 years and head up an investing club that started 15 years ago.

As a business journalist, I have a long-time interest in financial literacy. How do we as parents and educators teach young people the money management skills needed to lead a life of solvency and asset building?

Jack Rosenthal is the author of Teen Investing: The Ultimate Guide to Teenage Investing, available as a Kindle edition at Amazon.ca. You can borrow it free with a Kindle Unlimited subscription or buy it for $9.99.

The author wrote the book at age 17 during his senior year in high school. After learning to invest with his grandfather, he had organized a young investors club with more than 80 teen members who started with a minimum investment of $1,500 (USD).

“I wanted to provide a way for everyone in the club to get some investing principles for free. Once I learned that the principles I was teaching were relevant to any