Cryptocurrencies like Bitcoin continue to attract attention as some have generated returns of more than 5,000% in the first half of the year. Chris Blake, Senior Portfolio Manager, North American Equities, talks to Sara D’Elia about what investors need to know before investing in cryptocurrencies.
If there was an investment out there that would give you a six month return of over 5,000%, your only question might be where do I sign? We're talking today about cryptocurrencies. My guest says these so-called currencies are a black box with extreme risks. I'm here with Chris Blake from TD Wealth. Thank you very much for being here.
Thank you for having me.
So I want to start very generally, because most people know what things like bitcoin are. But how do you describe very generally what a cryptocurrency is?
A cryptocurrency essentially is a notional thing that represents your ownership in the mining of bitcoin. And bitcoins are mined through the solution of problems. People apply computing power. They solve increasingly complex problems. And that creates the bitcoin initially.
What are some of the other types out there? So I know bitcoin being one, what else is there?
There are two other major ones at this point. Bitcoin has recently just split itself, done a thing they called a fork, which is somewhat similar to a company spitting out a secondary company. And it's called bitcoin cash. That's the number three. The number two cryptocurrency is Ethereum.
These have gone up exponentially in the first half of the year. What's driving that recent price appreciation?
Now the biggest thing driving the price appreciation is simply supply and demand. There is a limited supply of these. As I mentioned, bitcoin is created through the increasingly difficult problems that are solved. And so it's in limited supply. So as demand goes up, the value or the price that people will pay for this, for each bitcoin, goes up.
What I think is really fascinating is in your publication, you say, I'm going to put the price appreciation aside, because there are some massive risks. What are you most concerned about with bitcoin?
The biggest things I concern myself with are number one, volatility. Number two, this is not really accepted as a form of payment in most places. It is accepted a few places. And the third thing is that there's nothing backing this currency. It really is just a representation of a digital placeholder in the ledger.
When you talk about this not being accepted as a payment-- if I'm understanding you correctly, it's that you can't go to the corner store and use this as a method to pay for a chocolate bar or a candy.
Not at this point, no. It's really not broadly accepted as payment. There are a few places online. Some shops using the Shopify platform have as an option being able to pay with Bitcoin. But it is certainly not broadly used by any stretch of the imagination.
And how does that impact its investment implications? So does it act like a stock or a bond that you can buy? And if you can, how do you go about investing in something like a cryptocurrency?
It's similar to a stock in the sense that you are speculating on its value, but very different from a stock in that when you own a stock, you own a percentage ownership of a company. And the company is selling products and generating profits.
This is very different from that. There is no profit being generated. There is simply a notional ownership of the solution of a digital problem that goes up in value simply because other people demand it. If people stop demanding it, it could easily go down very significantly in value.
And how would someone go about investing in this?
Well, if you are really dedicated to speculating on this sort of a game, you go and find yourself what's known as a digital wallet, in which the cryptocurrencies can be stored. And then you find an exchange that will sell you some cryptocurrency.
And you put it in your digital wallet. And in order to unlock it, you need a passcode, a cryptography key. It's all done on a cryptography key situation where there's a public key and a private key. And your private key, you have to keep private.
By the sounds of it, Chris, it doesn't sound like this is your average foreign exchange transaction.
No, it's a long way different from the average foreign exchange transaction. And I think a lot of people who find it difficult to look at the spreads that they pay on a normal transaction will find it even more difficult, if they could actually get some transparency on what spreads that they have to pay in order to buy cryptocurrency.
And this is because the supply-demand, I'm assuming.
Yes, it is.
Thank you very much.