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THE CRYPTO BUBBLE?
Thursday, November 16, 2017
President and CEO of Evolve Funds Group Inc. in Toronto
Raj Lala discovered the value of cryptocurrencies through personal experience. His Venezuelan-born wife was having a tough time getting money to her hard-pressed relatives facing a collapsed economy, massive shortages, runaway inflation, a broken financial system and severe restrictions on currency transactions.
"There was really no way to get money to them," says Mr. Lala, president and chief executive officer of Evolve Funds Group in Toronto.
It was when they turned to bitcoin as a means of transferring the money that "we realized this digital currency actually had a future."
Still, it wasn't the easiest thing to buy, and the process almost certainly would have put off ordinary investors. So Mr. Lala, whose firm has developed some intriguing exchange-traded funds, decided it might be useful to create one designed to track the price of bitcoin. If approved by regulators, it would be a first for Canada. That way, people who have no desire to own the actual currency, but believe both demand and price have further to run, could make a market bet on that view.
No such investment product has been approved south of the border. But that's certain to change now that bitcoin futures are expected to be launched by the end of the year, which will help to reduce wild price swings and to persuade more institutional investors to climb aboard.
Mr. Lala suggests that even gold bugs "may eventually get their heads around cryptocurrency, that it's kind of a safe haven currency."
And a heck of a lot more portable.
Applied mathematician and co-author of The Evolution of Money and The Money Formula
When Canadian mathematician and writer David Orrell began taking a close look at digital currencies a couple of years ago as part of his research for a book, enthusiasts were more excited about their growing use and acceptance as money than in their investment potential.
That's no longer the case. Today, "the buzz is all about the worth of bitcoin as an investment," says Mr. Orrell, co-author of The Money Formula. "So it is in more of a speculator-driven growth phase."
And when speculators jump in and prices skyrocket, bubbles can't be far behind.
"Bitcoin is in a bubble in the sense that it is only supported by group faith in its value," Mr. Orrell says. "But gold is the same. You can say that it has been around for a long time, but that just means group faith has lasted a very long time."
The crypto balloon will eventually be punctured, but don't hold your breath waiting for the collapse, particularly as new money pours in from institutional investors and traditional market players drawn to the exchange-traded funds, futures contracts and other vehicles that are already in the pipeline or on the horizon.
As for Mr. Orrell, "I'm all for keeping a small amount of money in cybercurrencies just because it's fascinating to see how these things are evolving, and it's more fun and you are more likely to get involved if you have a small stake. ... This isn't in quite the same spirit as a regular investment, though."
Bitcoin investor, tutor and consultant
Once Kenn Bosak started bringing home a regular paycheque, he was eager to invest a small portion in the stock market. But the costs and other impediments proved too much to overcome for someone of modest means. The young New Jersey resident did buy a couple of stocks using an online discount brokerage, but he was discouraged by the high fees and what he regarded as a slow-moving market.
Then he discovered bitcoin and bought $20 worth, which is what his two stock trades had cost. "I took a chance and invested in something that is also a currency," Mr. Bosak says.
"It made me feel a little more comfortable, because I wouldn't have to worry about selling a stock, paying a $10 fee and then transferring the money [from his broker] to my bank account. And then waiting 15 days for access to it. It was very disincentivizing."
Today, Mr. Bosak, 29, spends a big chunk of his time extolling the virtues of cryptocurrency investing and teaching others how to get in on the action. These include wealthy older investors who don't have a clue how to go about playing in one of the world's hottest markets.
"These are people who can't wait to throw money at stuff," he says with a laugh. But they first need to know how the technology works, how to safeguard, store and transfer their assets and how to recover them if something goes wrong.
Then, if the global financial system crashes and burns, as some cryptofanatics fear, those digital assets could have a big advantage over traditional investments - because they can be used as portable currency. "You can't take your Facebook stock to Wal-Mart."
Co-author of a new investor's guide to cryptoassets
Jack Tatar takes a dim view of investors who become so enthralled with a sexy new asset like cryptocurrencies that they ignore the basics of prudent portfolio construction.
"Believe it or not, I'm actually a very conservative investor," says Mr. Tatar, an early bitcoin proselytizer and co-author of Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond.
Mr. Tatar was working as a financial advisor for a major Wall Street firm in 2008 when the global financial meltdown made a hash of supposedly diversified investment portfolios.
Afterward, a growing number of advisors suggested that investors should devote 10 to 20 per cent of their total to less-correlated alternative assets such as precious metals, property or private equity, rather than just the usual mix of stocks and bonds.
Several years later, Mr. Tatar was looking into retirement investment strategies when he concluded that bitcoin could qualify as one of those alternative assets.
"My feeling was, why not put 5 per cent into bitcoin? I actually did that in my retirement account" at a time when that was even harder to do than it is today.
He did reasonably well with that first foray and wrote about the experience.
"I had a lot of people call me stupid, an idiot and everything else," Mr. Tatar says from his office in Pennington, N.J.
Today, as the number of digital currencies and their uses multiply and money pours in, some detractors have become converts or at least have gone silent. But Mr. Tatar, 58, still thinks the inherently volatile asset "shouldn't be any more than 10 per cent of a portfolio."
CEO of 3iQ Corp., which has created a fund dedicated to cryptoassets
When cryptocurrency investing first grabbed his attention, Fred Pye was running an exchange-traded fund that held the world's best-performing seven asset classes at all times. The idea was to be as diversified as possible. But the correlation among the various assets was too close for comfort. And if another global market crash occurred, the only alternative would be to convert everything to cash and wait out the storms.
Then the financial services veteran came across a report describing an asset class that didn't seem correlated to anything else on the market. "Every financial advisor in this country is on a quest for a top-performing, noncorrelated asset class. And that is something called bitcoin," Mr. Pye says from his office in Montreal.
To tap into that demand, the chief executive officer of 3iQ Corp. has launched a fund offering well-heeled investors an opportunity to participate in the world's leading cryptocurrency assets.
"I'm a real old dog who's learning a new trick," says Mr. Pye, who has been in the investment business for 35 years.
No one can predict which players will become the dominant Apple or Google of the blockchain technology that makes it all work, he says. "What we can tell you is the core cryptocurrencies - bitcoin, ethereum and also litecoin - are definitely large and powerful at this stage and so far ahead of anybody else it will be tougher [for new entrants] to compete."
It's the job of financial advisors to be informed, prudent and skeptical, Mr. Pye acknowledges, before launching into his sales pitch. But they need to know that this is "the single largest financial innovation in our lifetime."
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