No doubt, one of the hottest topics in today’s financial and tech world is cryptocurrency. However, as Financial Advisors, one of the critical job requirements is to do our due diligence before recommending anything to our clients. Cryptocurrency is an elusive, misunderstood investment product that the best technical and financial minds struggle to comprehend in its totality. Much like the dot-coms of the late 90s, you have to be sure you’re backing the right horse. There are still so many uncertainties surrounding it, and there are little to no controls or protections in place. Join us today as we discuss what we have discovered so far as we begin our investment journey with cryptocurrency.
Transcription
Rob (00:00):
Hello. This is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing I finally bought some crypto. Mike, I always think it’s important before we recommend anything to clients that we investigate first, we put our own money into investments, into strategies. And I thought I should with all this hype about crypto, I thought it was time to do some stuff.
Mike (00:39):
So where did you go to do this? Did you go to Wells Fargo or Goldman Sachs to do this? Or where did you buy this crypto, Rob?
Rob (00:45):
Well, the first purchase was actually a little bit different. Our parent company CI had launched a crypto exchange-traded fund, or an ETF. And it was a Bitcoin fund. And I have a leverage account, and I decided that I was going to put $5,000 as an experiment.
Rob (01:08):
Now, I counterbalanced that, because I also bought $5,000 worth of Apple, Microsoft, Google, and MasterCard, but I put the $5,000 in. It was relatively straightforward. I still own it today. And my thought was twofold. One, if I did it on a leverage account, at least I could write off the interest. And if I did end up losing the whole $5,000, at least I could declare it as a capital loss. And hopefully, the other investments would provide me with a capital gain.
Mike (01:36):
I wonder if you can write off the interest. That’s-
Rob (01:39):
Well, on a leverage account, in theory, you can.
Mike (01:42):
It’s got to be expected to make money, either interest or dividends or a capital gain. There’s [inaudible 00:01:47] going to be some tax law. There are going to be some great tax areas coming up in the next year.
Rob (01:50):
That could be a good question for our accountant.
Mike (01:52):
Yeah.
Rob (01:52):
So then I decided, after that, that there’s all these different cryptocurrencies out in the market and I should really investigate some of those rather than just Bitcoin. I was at Hillcrest Mall, walking around, and I come across a vending machine for crypto. You can create a crypto wallet and cryptocurrencies. Now, I don’t know the name of the vending machine. I can tell you the name of the crypto wallet that I have.
Rob (02:20):
And so I downloaded the app on my phone and I sat there in front of the machine and I did all the work that you need to do. Most of the work, you’re doing on your phone, not… And then I arranged to transfer initially $500 into my crypto wallet. And I went out and I bought five different cryptos, cryptocurrencies. I put a hundred dollars into each, because I believe in diversification. And this was my first exposure.
Rob (02:44):
Now, what was interesting is the minute you did the first transaction, which was really easy to do, literally, you can buy a crypto in seconds once you’ve got a wallet, they trade 24 hours a day, seven days a week. So you can buy it at three in the morning if you wanted to. But the interesting thing to me, which I didn’t expect to happen is suddenly two and a half percent of my a hundred dollars disappeared. Even though it was supposed to be no cost to the trade, somehow between what it was quoted at and what I actually got it at, there was a two and a half percent difference. And that happened on every single trade I did. So even though I put in $500, I suddenly was down about, I guess, $15.
Mike (03:26):
Yeah. Spreads and commissions, they’re two different things, I guess, right?
Rob (03:29):
Very much so.
Mike (03:30):
Yeah.
Rob (03:30):
I don’t know where the two and a half percent went or whose pocket it went into, but it went very quickly. So then I started to look at all the different cryptos out there. And in my wallet, I could buy from 40 different currencies. Now they all had fancy names and fancy descriptions, of which none of them I understood what they meant, to be quite honest, other than Bitcoin and Ethereum. And even those two are a bit of a stretch for me.
Rob (03:55):
I decided I needed to build a diversified portfolio of crypto. So I transferred another $1,000. So now I’ve got $1,500 in my wallet. And then I’ve got that $5,000, which is now $4,000, in my Bitcoin ETF. On each time I buy a cryptocurrency, there’s a two and a half percent cost. That’s pretty expensive. That’s back to the days of buying stocks and paying a massive commission when you buy stocks. Even 1% was considered really high back then. This stuff trades at two and a half percent.
Rob (04:32):
But they’re all advertised as free commissions. So that’s a real stretch on the rules and to my knowledge. What are your thoughts on this? Mike? What questions do you have for me?
Mike (04:44):
When you look at crypto, I tend to look at it like the dot com companies of the 1990s. People always ask me is crypto important? And I do feel crypto is part of the future, right? And when you look at countries like Africa that have, I don’t know , probably I’m going to say something really wrong here, but there’s probably like 30 or 40 different countries in Africa, in that continent. And none of them have stable governments. And there have always been issues in all these different small countries in the world doing trade with other parts of the world, because they couldn’t hold a currency and the governments weren’t good at stabilizing their currencies.
Mike (05:20):
So if they had to buy it from the US, they’d have to work in US dollars in this country. Or if they’re buying from a different, Germany, they’d have to work in euros. So all these different countries in the world would have to try to facilitate the currencies in the countries they’re doing trade with.
Mike (05:33):
Cryptocurrency, having a unique currency that’s global, gives tremendous opportunity for people in these countries and emerging markets to do trade with the free world efficiently. So it does have a great purpose over there. And when I go and compare it, it’s much as when this dot com idea came out. Was dot com the future? And in the ’90s, they all said, “This is going to be future.” And it has turned out they were 100% right. Dotcom is the future, and this is where the world has moved.
Mike (06:03):
But when you go and you say, “Did a lot of people make money on those dot com companies in the 1990s?” No, they didn’t. There was thousands of them around, and they had super huge valuations at the time. And probably 90 to 95% of them disappeared and became worth zero.
Mike (06:23):
On the flip side of that, there were a few ones that made it through, those golden child’s like the Amazons and that made it through and have become the great companies of today. But when I look back on the experience that we saw in these dot com companies, was I better off trying to pick the dot com company that was going to come out through all this, or wait until all the smoke settled and pay a little bit more for Amazon that was established and enjoy it growing by 10,000% from the year 2000 to now, rather than get that extra bit of percentage in the beginning?
Mike (06:54):
So at some point, there’s going to be a cleaning of all these cryptocurrencies. And there’s going to be a mass problem. And there will be a bunch of dust that settles. And somewhere in the future, they’ll become part of our society. That’s just an opinion, but that’s what I feel is going to happen with them.
Rob (07:13):
So a couple of things, I thought there was an interesting quote, and I believe this today even as a crypto owner. It’s from John Oliver, “Everything you don’t understand about money combined with everything you don’t understand about computers, that’s the definition of cryptocurrency.” And it is totally true.
Rob (07:32):
Anyone who thinks they understand on how all this stuff works, they’re probably lying or they have a PhD in this stuff. It’s one or the other. The average investor that I’ve dealt with over the last 30 years could not explain cryptocurrencies and all the different currencies out there ever. They can’t. And I can’t understand it.
Mike (07:52):
And I’ve had some smart clients come in who might understand some of the technology, but don’t understand the finance behind it. It’s tough to get those two sides working together, because it’s very complicated on both edges of that.
Rob (08:04):
So let’s look at a couple things. What’s the goal of the investment? Why did I? Now, I did this as an experiment. I did it sort of … This is my testing kitchen. Let’s call it that. But if you’re going to buy cryptocurrency, what’s your goal?
Mike (08:18):
Make money. It’s what most people are doing.
Rob (08:21):
Are you trying to get income from it?
Mike (08:23):
No.
Rob (08:23):
Or is it to protect against inflation?
Mike (08:26):
Nope.
Rob (08:27):
Is it stable?
Mike (08:29):
Nope.
Rob (08:29):
Can you spend it?
Mike (08:31):
Not really.
Rob (08:32):
So the only goal that you have is you’re hoping it’s going to go up in value.
Mike (08:36):
That someone’s going to pay you more money than you pay today.
Rob (08:39):
Absolutely. What are your expected returns for it? So if we buy a stock, we know historically, over long periods of time, they’ve averaged a 10% return, if you buy a global stock market.
Mike (08:51):
And it makes money. It has profits and makes a product or produces something or service or something like that. Crypto does nothing. It just exists.
Rob (08:59):
What’s the expected return of a currency?
Mike (09:02):
Zero.
Rob (09:03):
So what does that mean? The Canadian dollar never makes money?
Mike (09:06):
Well, for every time when you compare currencies, there’s always a net-zero gain between currencies. So for every currency that goes up, another currency has to go down. And that’s just your math, right? If you invest in all the currency in the world for all the time, your net return is going to be zero, unless it’s invested in some type T-bill or something’s going put some interest. But your net returns is going to be zero.
Rob (09:28):
So we’ve talked about returns. We’ve talked about the goal. What’s the risk of buying a cryptocurrency?
Mike (09:34):
Oh, well, there’s a ton. To start off against this performance, there’s whether you pick the right one, if it’s going to be there a couple years from now or people are still going to be willing to pay money for that. The thing that blows me away is if all of a sudden, let’s take Bitcoin for an example, if someone came up with some virus that destroyed Bitcoin records and they couldn’t work it anymore, there’s no one really that fixes it. It’s not controlled by government. No one really cares that you lost your money.
Rob (10:07):
No. No [inaudible 00:10:08] one would no one give you your money back.
Mike (10:10):
If you invest in a bank in Canada, the bank goes bankrupt and you lost your money, the government will step in and say, “Okay, that wasn’t fair. This wasn’t expected. We’re going to help out to make sure these people were taken care of.” Who’s going to help out these Bitcoin people? No one. If anything goes wrong, there’s no protection. You can lose your password. We’ve had many stories of people losing their passwords. There’s just nothing you can do. There’s no one to go to. You put your sob story in the paper and they write you as a story. You don’t get any money back.
Rob (10:37):
Another big risk is I think regulations are going to change and can change at any point in time. We’ve already seen China basically not allow them, certainly not allow the mining of them. A lot of countries haven’t made a decision on it. But at some point, they’re going to have to. My guess is most countries will probably launch their own cryptocurrency of some sort.
Mike (10:59):
Yeah. They want their tax dollars. The one problem we had with cryptocurrencies was originally, when they were being invisible, if everyone moved to cryptocurrencies and they still stayed anonymous and no one knew what was being spent, governments could no longer collect tax dollars. If that happened, there’d be no police force, there’d be no fire departments, there’d be no government, and the world would fall apart.
Rob (11:21):
There’d be no snow shoveling.
Mike (11:22):
Yeah.
Rob (11:24):
All the tractors wouldn’t be on the road today, clearing up from this massive snowstorm we’ve had.
Mike (11:28):
Yeah. And I guess you could pay your crypto Bitcoin to try to pay the guy with a plow to come by who would [inaudible 00:11:34]. But all the stuff we’ve done to organize governments and societies that work well together fall apart once you decide to go and say, “We’re going to put everything to a cryptocurrency that’s fully anonymous.”
Rob (11:46):
So what’s the tax treatment on cryptocurrencies? So let’s say my $5,000 grew to $10,000.
Mike (11:54):
I don’t know.
Rob (11:55):
Do I have to declare that?
Mike (11:58):
I think it’s still a gray area. I think the government’s saying the maximum, right? But whether it’s capital gain or whether it’s income, depending on what’s being used for, I don’t know if it’s been fully… I know they put out what they think it should be, but it has yet to be challenged in tax court to see what it’s going to look like.
Rob (12:17):
Do you think most investors are actually paying their capital gains if they’ve sold some of those cryptocurrencies they’ve actually made money on?
Mike (12:23):
Unless they’re in an ETF, they’re going to receive receipts for them. But if they’re outside ETFs, I would doubt it.
Rob (12:29):
And what about their capital losses if they happen to have lost money on Bitcoin or something like that?
Mike (12:34):
They’ll probably claim those.
Rob (12:36):
At least they’ll try to.
Mike (12:36):
They’ll try to. But again, there’s no T3s created by the … they’re created from the ETFs, but they’re not being sent out by Bitcoin company. Bitcoin’s not going to send you a T3 for how much you made on Bitcoin last year. It’s not happening.
Rob (12:49):
So it was interesting, before the podcast, you asked me what my crypto wallet was worth. Now, we all know I put in $1,500. And I had told you, I was going to tell you it was worth $1,430. But I looked just before we did this podcast. There was only $1,340.
Rob (13:07):
So here’s how I’ve been managing this thing. It’s kind of interesting. I decided I needed some rules. So I decided if any one coin went up 30%, I would sell. Now, of course, I don’t get to keep the 30%, because as we said, there’s actually a 3% commission on the sell. For some reason, I sell at a $1.30 and I only get back $1.27.
Rob (13:29):
And then what do I do with the money? Well, it sits in my wallet, earning no interest initially. So then I decide to go buy another currency for $100. If a currency drops by 40, 50%, I should be trying to buy more of it. But I’m struggling with that mentally, because I don’t know why it’s already down 45%.
Rob (13:49):
I’ve been an investor and a financial advisor for more than 30 years, and I’m struggling with my $1,500 in my crypto wallet. I can’t imagine what’s going on with everybody else out there.
Rob (14:01):
That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart from The McClelland Financial Group of as Assante Capital Management, reminding you to live the life that makes you happy.
Assante Capital Management (14:13):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited. Leveraging carries its own risks and is not for everyone. Talk to your financial advisor for advice on properly managing those risks. The material herein is not intended to provide and should not be construed as providing individual financial, investment, tax, legal, or accounting advice.
