Investors either too late or too queasy to ride the bitcoin roller-coaster are turning instead to companies that support cryptocurrency transactions – but experts warn they can be just as risky.
There are a handful of Canadian publicly traded companies – and more on the way – looking to capitalize on the exploding popularity of digital assets such as bitcoin and ethereum. They include digital currency "miners" that verify and process transactions in a public ledger known as blockchain, crypto investment firms and online payment platforms.
Some examples include cryptocurrency miner Hive Blockchain Technologies Inc., blockchain technology company BTL Group Ltd., investment platform Goldmoney Inc. and payment platforms Glance Technologies Inc. and NetCents Technology Inc.
While cryptocurrency-related companies are considered a more diversified way to play the virtual money market, they're just as volatile. Over just the past month, bitcoin has surged by about 175 per cent, while some of these stocks have gained more than 75 per cent. NetCents is up a whopping 250 per cent. The S&P/TSX composite index, meantime, has risen by less than 1 per cent over the same period.
Any investment in the cryptocurrency sector should be viewed as high risk, says Ryan Modesto, chief executive officer at independent research company 5i Research.
"Volatility is the name of the game," Mr. Modesto says. "There's a lot of interest in the sector right now. Investors need to approach it with caution and their eyes open."
For investors with some "play money," Mr. Modesto suggests sticking to better-known companies or those with underlying businesses beyond just bitcoin or other virtual assets.
Some of his suggestions include Mogo Finance Technology Inc. and Goldmoney, as well as Hive, the latter of which is backed by well-known financiers in the gold-mining industry such as Frank Giustra.
"If you're looking [for] exposure to digital currencies or blockchain, these are the three names you might look into first before going into some of the smaller, higher-risk names," says Mr. Modesto, who doesn't formally cover these companies.
Still, Mr. Modesto says investors also need to be wary given the soaring valuations of stocks like Hive, which has risen by about 400 per cent since the company started trading on Sept. 18. Its market capitalization has surpassed $900-million.
At least 50 firms tied to blockchain and cryptocurrencies are set to list on Canadian stock exchanges in the next year, GMP Capital CEO Harris Fricker told Bloomberg recently. At least two Canadian exchange-traded fund providers – Evolve Funds Group Inc. and Purpose Investments Inc. – have filed regulatory documents to launch bitcoin ETFs.
While there's a lot of hype around and investment in cryptocurrency and blockchain companies, Echelon Wealth Partners president Rob Furse cautions it's still an early stage ecosystem.
"It needs to mature to have a more widespread application," he says.
Investors should also be wary of companies that simply add the blockchain or cryptocurrency label to their operations.
"Be wary and be skeptical of how relevant the blockchain is to anyone's business model," Mr. Furse says.
"There is no harm in dabbling in it," he says of the investor interest in the sector. "The harm is when people get overexcited."
While the market is very speculative right now, Mr. Furse believes digital currencies such as bitcoin and blockchain in particular are reshaping the financial-services industry.
"I'm not trying to dismiss at all the changes and opportunity here," he says. "I am merely being realistic about the Canadian public equities that are available right now."
More conservative investors that want in on the cryptocurrency trend could choose more indirect investments, such as power companies that help support the blockchain's massive energy requirements, Echelon Wealth Partners analyst Ralph Garcea says.
He cites data from cryptocurrency website Digiconomist showing that bitcoin mining currently consumes as much energy a year as Denmark, or about 32 terawatt hours.
"Utility-scale solar is definitely a way to lower input costs for the crypto-miners," Mr. Garcea says. He says a couple of stocks to consider include U.S. names such as First Solar or the Guggenheim Solar ETF.
"It's another way to play the sector without the volatility we're seeing," Mr. Garcea says.