Going crypto — or not

New digital currencies are popping up all over and prices are skyrocketing. Is it time to get in on the rush or is it better to stay away?

When Bitcoin, the very first digital currency, was released in 2009, most investors were skeptical. As an intangible tender with no country of origin, it was generally considered part of a techno-fad that would quickly dissipate.


Almost a decade later, not only are there at least 900 additional cryptocurrencies circulating, but their returns are far outpacing those of other asset classes such as global real estate or gold.


Along with bitcoin, we now have ethereum, monero, dashcoin, dogecoin, litecoin and zerocash, to name just a few of the most popular. The value of some of these digital currencies is growing exponentially too. Ethereum, for example, rose 3,000% in 2017 alone.


With bitcoin, the evolution has been even more spectacular. In 2009, you could have purchased 5,000 of the coins for $27. In December 2017, the coins were selling at an all-time high of more than $15,000 apiece. According to Bitcoin Canada, more than $40 billion is transferred using these digital tokens in a 24-hour cycle. Michael Gord, founder of MLG Blockchain Consulting, a blockchain development and consulting firm based in Toronto, says it’s just the tip of what’s to come for crypto-currencies and blockchain, the technology that allows the currency to function. “In five years we’re going to see these tokens introduced into the jungles of Thailand,” he says, noting that as the founder of MLG, he already pays his employees living outside of North America in bitcoin. “I’m a big believer in this currency for the future — I’m all in.”


CPA Magazine’s tech columnist, Dwayne Bragonier of BAI Bragonier & Associates, has a similar view. He calls blockchain the “most revolutionary and disruptive technology” to hit the accounting profession since computerized bookkeeping. He believes all conventional monies will be replaced by the digital kind by 2040 and that we’ll see widespread use even within the next 15 years.


The fact that more and more entrepreneurs, venture capitalists and even banking institutions are joining the crypto- currency craze is quite telling. The Bank of Montreal recently joined a collaborative project with IBM Corp. and other banks to build blockchain-based technology to support these trading transactions. Meanwhile, TD Bank and Royal Bank of Canada will each be testing digital identity networks powered by similar technology. The People’s Bank of China is also rumoured to be testing its own national digital currency among the country’s commercial banks.


All of this points to the fact that now could be the ideal time to add cryptocurrencies to your investment portfolio. But even with the potential for huge returns, tread cautiously. Many experts are still declaring the cryptocurrency market a Wild West where losing everything is still a real possibility. In fact, in September 2017, the Bank of Russia declared that the tenders would not be traded there anytime soon and China banned blockchain-based startup financing. The perception of core cryptocurrency users as criminals is not entirely unfounded, either. The perpetrators behind the massive 2017 cyberattack affecting 150 countries were demanding bitcoins in exchange for decryption keys to unlock computers.



All cryptocurrencies work through the support of a blockchain, which Bragonier describes as a kind of digital ledger that instantly records all transactions in chronological order. As he explains in a series of CPA Magazine articles on blockchain (Technophilia, September, October and November 2016), “Each and every transaction is broadcast to participating computers on a peer-to-peer network so they can all record transactions in their individual ledgers.” He adds that, because this database is not owned by a single proprietor, common consensus among all these connected ledgers is needed to authenticate each transaction, which is then stored on a block in the blockchain. Each computer participating in the network maintains a copy of the complete ledger, which is updated in real time as new blocks are created and validated. Not only does this eliminate the need for a financial institution or any third party to control exchanges, it also allows for almost instant digital asset transfer in a secure environment.


In a 2016 Ted Talk on the technology, entrepreneur and researcher Bettina Warburg likens blockchain to Wikipedia, only instead of storing words and images, the technology keeps a secure record of the ownership and location of assets such as digital currency. She believes the blockchain’s ability to reduce uncertainty by keeping a secure record of transactions will radically transform economies, allowing all kinds of companies and consumers to interact with complete transparency. It would create the perfect ecosystem to bring digital currencies into the mainstream.


The transparency of blockchain is a huge selling feature, say cryptocurrency fans. MLG’s Gord anticipates we’ll eventually have a completely open financial system, making it “faster and simpler to move money around the world” while simultaneously tracking the entire supply chain and movement of goods. “I think the banks are coming on board for fear of missing out, but I don’t think they’ll be able to innovate as quickly as the startups in this space,” he says.


Gord also points to the benefits of better security around digital exchanges. “With bitcoin there is no anonymity because all transactions are stored on the blockchain,” he says. “Sure, there are still fraudulent people who use bitcoin, but there is way more fraud happening with regular currencies.”


Duncan Brown is tackling the security issues around digital exchanges head-on. The 24-year-old coding whiz is cofounder of Toronto-based Distributed ID, a company building infrastructures for managing digital identities using blockchain technology. In 2016, he was part of a four-person team that won a US$20,000 hackathon competition using the ethereum network to develop a prototype for digital identification. The exposure enabled him to secure a contract with a Chinese company to develop a blockchain-based identity system for its 20 million users. “We are building an online profile that would flag fraud in mobile payments in the same way credit-card companies are doing today,” says Brown, noting that rather than a password that can be compromised, a person’s identity would be based on transactions and past purchasing behaviour. “Eventually we could do the same with cryptocurrencies.”


While he’s owned bitcoin since 2012, Brown recognizes that many people have trouble wrapping their heads around the technology. “I’ve finally gotten my father to invest and he’s doing incredibly well,” he says. “But it’s a really hard thing to invest in if you don’t understand the concept and security functions.”


Brown’s father, Stewart, admits that he probably wouldn’t have added bitcoin to his portfolio without his son’s encouragement — and even now, it still makes up less than 5% of his overall investments. “I’ve watched the currency go up and up, and slowly over time Duncan has made me realize there is something different happening in the fintech world,” he says. “I don’t really understand it yet or know where it’s going but I don’t think it can be ignored.”


Tekin Salimi, a Toronto-based corporate lawyer with a focus on blockchain technology, likes the fact that a lot of the technology was either created or is supported close to home. “Canada has a unique position in the whole blockchain evolution because ethereum was born in Toronto and Waterloo so there is a hub of experts in both cities,” he says. That’s partly why he thinks, for those looking for an alternative (high-risk, high-return) asset class, there’s never been a more exciting option than cryptocurrencies today.



There are a number of reasons why many investors are steering clear of cryptocurrencies, at least for now. For one, investing directly is complicated: you have to figure out the technology. Also, the options for investing indirectly are limited. And Salimi says investors need to do a significant amount of due diligence in researching each token to determine the credentials of the company behind it, the underlying code it is built on and its value (i.e., is it just a currency or does it have additional functionality?). Some blockchains, for example, allow token holders to receive a percentage of the value of all transactions that happen on their network, and others will give investors voting rights on any upgrades to the currency’s protocol rather than leaving that to the developers. “It’s also important to ask about total supply as some currencies are limited,” he says.


Another drawback is that there is no established body of law around cryptocurrencies yet. The space is new and token investors are relatively unprotected, compared with shareholders for traditional businesses, whose rights are established, Salimi says. He also points out that “coding this stuff is incredibly difficult and still on the forefront of research.” By way of example, he refers to Parity Technologies’ multisignature wallet, which temporarily froze about $280 million in ethereum last November. “All of this is evolving in real time and there are growing pains with that.”


With no official rating systems for the blockchains that produce currencies, Salimi says third-party firms are often hired to “audit code” them before the release of their first coins, also called initial coin offerings. “You want to see who the core teams building these projects are and whether they have a history of abandoning the networks once launched, instead of building value over time,” says Salimi. “It’s really a unique class of risk that doesn’t apply to other investments.”


A final red flag for would-be investors is the fact that government regulations are still preventing the widespread use of cryptocurrencies in retail environments. “When it gets to the point that I can come to any cash register and pay with bitcoin, that will be powerful, but if I can’t exchange it for goods and services what do I really have?” says James Zsebok, who is based in Windsor, Ont., and traded billions in foreign currencies for his clients when he was CFO for Flex-N-Gate Corp. He’ll often advise investors inquiring about digital coins to consider more stable options such as gold. “In my personal portfolio I use gold to manage risk because theoretically the belief is you can exchange it for other things,” he says.


Zsebok hasn’t ruled out investing in cryptocurrencies entirely, but says he’s more interested in ventures such as ethereum, which is still affordable and has smaller fluctuations in price than bitcoin. “But I still consider investing in any of them like buying a lottery ticket — it’s a leap of faith.”


Whether to get into the cryptocurrency game and how much to invest comes down to risk tolerance and perspective, says Bragonier. “The currencies are increasing in value because the risk is high, but then so is the return,” he says. “A sophisticated investor will simply look at these coins as another investment opportunity — a purchase of something now for future value.” Given his age and the amount of disposable income he feels comfortable investing, Bragonier isn’t willing to take the risk. “But if I was in my mid-30s I probably would.”