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CEO of Coinsquare, Cole Diamond, poses for a photograph in his Toronto office, on July 7, 2018.

Christopher Katsarov/Globe and Mail

Glancing around Coinsquare’s new loft-style Toronto office, one would never guess that the cryptocurrency market has been in a lull for much of the past six months.

In spite of bitcoin’s more than 60-per-cent plunge from its high of nearly US$20,000, the cryptocurrency company has been on an investment-fuelled growth spurt. It recently moved into a second office – a 28,000-square-foot space featuring vaulted ceilings and exposed wooden beams located in Toronto’s trendy west end – to accommodate its headcount, which has more than tripled to 160 since the start of the year.

And the company has ambitions for an international expansion, with plans to launch into Europe in the fourth quarter of 2018 and into the United States early next year.

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But with investor appetite for cryptocurrencies waning and cryptocurrency trading revenues expected to erode, the startup’s success will depend on its ability to branch out into new business lines and to navigate the rapidly evolving regulatory landscape facing the nascent sector.

Coinsquare’s chief executive Cole Diamond signalled back in January that he intended to take the company public on the Toronto Stock Exchange in September, but discussions with regulators have prompted him to delay the planned $150-million offering. The company is currently in talks with the Ontario Securities Commission about how the trading platform should be regulated, and is seeking to become a member of the Investment Industry Regulatory Organization of Canada, or IIROC, by the first quarter of 2019.

“If there is risk related to regulation, I don’t think that’s necessarily fair to offer that to retail investors at this point,” Mr. Diamond says.

Regulatory uncertainty has been the biggest question mark hanging over the emerging industry, as securities watchdogs wrestle with how to respond to new cryptocurrency-related investment schemes.

Mr. Diamond wants Coinsquare to be regulated in order to provide a sign of legitimacy. In an industry whose reputation has been marred by high-profile hacks and the 2013 bust of online drug marketplace Silk Road, Coinsquare hopes to establish itself as the trustworthy alternative to the scams prevalent throughout the cryptocurrency world.

To get that message out, the company spent millions this year on a provocative ad campaign. It included a 30-second television spot, which aired during Leafs' and Raptors' playoff games, featuring a cast of unsavoury characters cautioning the viewer about the potential pitfalls of investing with less scrupulous competitors.

Of course, the company’s approach comes at a cost. Mr. Diamond says Coinsquare leaves money on the table by turning away questionable clients, limiting the tokens it offers on its platform and taking its time on product launches. “We go a lot slower than many of our competitors," he says.

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Mr. Diamond, the grandson of Cadillac Fairview Corp. co-founder Eph Diamond, wasn’t looking to invest in a cryptocurrency company when he met Coinsquare founder Virgile Rostand in April, 2016. He had just heard about this new virtual currency called Ether and he wanted to buy some.

The former performance marketer had just quit his job at Jumbleberry and was cautiously plotting his next moves. His last stab at entrepreneurship – an e-commerce site called Gift Network – had failed after three-and-a-half years, forcing Mr. Diamond to sell his house. But he was undeterred.

After experiencing first-hand the arduous process of trying to buy cryptocurrency, Mr. Diamond had found his next opportunity. That December, he invested in Coinsquare and became its CEO, with the goal of expanding the company beyond its core business of cryptocurrency trading and into other products and services.

His timing couldn’t have been better. Over the next 12 months, the price of Bitcoin soared nearly 2,000 per cent, from less than US$1,000 to almost US$20,000, before retreating, while the number of cryptocurrencies exploded to more than 1,000. Coinsquare started the year with just more than 100 verified users and ended it with more than 100,000, while revenues grew by more than 200,000 per cent.

It was the wildest ride Mr. Diamond could have imagined, but he knew the run-up was “a little too fast.”

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“We were a bit nervous that it could end badly, which is why we went out and raised all this capital," Mr. Diamond said.

The company raised $46.3-million in equity financing from investors – which include a special purposes fund from Fidelity Investments – between last September and February, at the height of the crypto-mania. The company was “unbelievably profitable” at the time, but Mr. Diamond wanted to build a war chest in case the market soured.

It proved to be a prudent move. Immediately after Coinsquare closed its last financing round, it was confirmed that cryptocurrencies had entered a bear market.

Although Coinsquare’s finances are not public, Mr. Diamond says the trading platform is making less money today than it was back in November and December of last year.

“Fewer people coming into the market means there’s less money coming into the market, which means that there’s less trading in the market. And we make money when people trade,” Mr. Diamond says.

The virtual-currency trading business faces other challenges as well. Deepak Kaushal, a technology sector analyst at GMP Securities, says the profitability of facilitating trades is likely to decline as the cryptocurrency market becomes more efficient, similar to what has occurred with traditional trading desks.

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Mr. Diamond is not overly concerned by that trend. His vision is to create a “leading 21st-century financial institution," one that goes beyond just the trading business.

The company has a wealth division that services high-net-worth clients, a licensing department that allows companies to launch their own trading platforms using Coinsquare’s technology and a Quebec-based business that services crypto farms, the large warehouses where super-fast computers churn out new coins. A custody service that would securely store customers’ crypto assets and an investment fund and portfolio manager called Coincapital are also in the works.

But Coinsquare faces stiff competition as other exchanges have also branched out into ancillary services in the search for new ways to make money. Among them are major U.S. player Coinbase and Galaxy Digital LP, a new crypto merchant bank launched by former Goldman Sachs partner Mike Novogratz.

Boris Wertz of Version One Ventures, a Vancouver-based venture-capital fund that is an investor in Coinbase, says running an exchange can be “very profitable” for those who have scale, but increased competition and regulations could erode that profitability over the next few years.

“We will see some significant consolidation,” Mr. Wertz says. “Only the largest exchanges will survive.”

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