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Legendary investor Warren Buffett once described it as a "mirage" to be avoided by any sensible investor.

JP Morgan Chase chief executive Jamie Dimon has famously described it as a "fraud" and last month warned that if "you're stupid enough to buy it, you'll pay the price for it one day."

Another global bank boss, Credit Suisse's Tidjane Thiam, calls the manic trading that has driven its price into the stratosphere the "very definition of a bubble" that's destined to end badly.

For Larry Fink, head of global asset management giant BlackRock Inc., its soaring value "shows you how much demand for money laundering there is in the world."

But other prominent financial voices such as Richard Branson, Nassim Taleb of Black Swan fame and most denizens of Silicon Valley see it as the future of money.

Welcome to the complex world of cryptocurrencies, where the only people without strong views on one side or the other are still trying to make sense of a red-hot asset that almost no one took seriously as an investment just a few short years ago.

"Cryptocurrencies are an important technological innovation that has the potential to change the way business transactions are conducted," says Andrew Lo, director of the MIT Laboratory for Financial Engineering in Cambridge, Mass. "However, these are very early days for this technology … so I would say that this is an area best reserved for the most sophisticated and well-heeled investors at this time."

Recalling the early internet search engines like AltaVista and Lycos and social media entrants like Myspace that fell by the wayside, Dr. Lo warns that "there will be many, many failures and only a very few successes. So investor beware!"

Inside is a look at some of the issues, risks and opportunities.


Bitcoin emerged in early 2009, in the wake of the near-collapse of the global financial system, as a digital platform carrying programmable money with no links to governments, central banks or financial institutions.

The total supply of bitcoins will be capped at 21 million coins – it's about 16.7 million now – and every transaction is recorded in a digital ledger distributed across a network of computers, known as a blockchain.

Bitcoin's initial value was zero. But within two years, it was being derided as a bubble that would soon be punctured by governments unwilling to give up their money monopoly and worried about the digital currency's adoption by terrorists, drug traffickers and money launderers eager to hide their financial dealings.

Yet eight years, a couple of major scandals and plenty of roller-coaster rides later – and despite the emergence of rival payment platforms like ethereum and litecoin – bitcoin remains the top dog in the cryptocurrency world.

On the investment side, though, the jury is still out. "Understanding what a cryptocurrency is and how it works is very complex – even for the tech savvy," says Matt Karnes, managing partner of GreenWave Advisors in New York. "That, in and of itself, will keep a large pool of investors away."

The blockchain technology that underpins all cryptocurrency ventures is where investors should put their focus, advises Vitaliy Katsenelson, chief investment officer at Investment Management Associates in Denver, Colo. The technology has enormous potential to disrupt the global financial sector. But bitcoin itself "is a bigger-fool bubble of enormous proportions. Nobody knows how much it is worth – it generates no cash flows."

Initial coin offerings

Even the biggest of crypto fans worry about the dangers lurking in initial coin offerings being rushed to market by a host of companies and promoters eager to cash in on surging demand. For many investors caught up in the hype and hope, it will be like revisiting the worst excesses of the dot-com era, with similar dire outcomes.

ICOs are a form of crowdfunding by startups seeking to build cryptocurrency or other blockchain-related applications. The coins are similar to equity in an initial public offering, but without the regulatory oversight or backing of financial institutions. Instead of shares, investors get digital tokens needed to gain access to the platform, product or service. The bet is that demand will drive up their value if the new app or digital currency takes off.

Through mid-October, 203 ICOs raked in a total of just under $3.3-billion (U.S) this year alone. Many could end up like DAO, a German virtual venture that raised $150-million through an ICO, despite having no address, board or management structure. It was dubbed the "DAOsaster" after users exploited code flaws to siphon off a big chunk of its assets.

"It's a mad rush to get money in the ICO world, with companies coming out that probably shouldn't be getting any money," says Jack Tatar, a cryptocurrency advisor, author and angel investor. "To us, it has to be a viable business that could have raised money through [issuing] equity or something like that."

The investor is essentially buying the "coin" as equity, Mr. Tatar says. "If the coin doesn't really have a utility, and you get the sense that they're just raising money to raise money, that's a red flag."

Any asset class that involves complex technologies, faces an uncertain future and lacks the regulatory oversight needed to protect ordinary investors is bound to be fraught with risks. Here's how some experts suggest investors should navigate the tricky terrain.

Dos and don'ts of crypto-investing

- Do thorough homework, make sure to gather as much negative and positive information as possible and reach your own conclusions. Unlike, say, tech stocks, junk bonds or gold, when it comes to crypto-investing, most financial advisors won't know any more than you do.

- Start small and keep exposure to no more than 5 or 10 per cent of your portfolio. Always treat it as an alternative asset.

- Be prepared to live with wild price swings, bubbles and near-collapses until the entire class goes more mainstream. The small size of the market leaves it more prone to volatility and manipulation.

- Investors with low risk tolerance should wait for the inevitable arrival of regulated market vehicles such as exchange-traded funds, the entry of blue-chip institutional money and improved liquidity.

- Steer clear of initial coin offerings that don't come with a clear business plan and a product that makes sense. Right now, the big money is coming from a raft of new cryptocurrency hedge funds, venture capitalists, wealthy families and deep-pocketed foreign investors, notably in China. They can afford the losses.

- Don't worry about the fact that some of your fellow crypto-investors may be money launderers, tax evaders and other assorted criminals. They tend to be early adopters of financial technologies, as well as big risk-takers. The authorities will catch up to them without pulling the plug on an increasingly important global asset.


We asked the following experts for their views on cryptocurrencies:

Raj Lala, 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.


David Orrell, applied mathematician and co-author of both 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."


Kenn Bosak, 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."


Jack Tatar, 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."


Fred Pye, 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, non-correlated 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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