Front Burner - Cryptocurrency’s wild ride

Episode Date: July 1, 2021

As cryptocurrencies experience “bonkers” volatility, The Logic’s Claire Brownell explains why some regulatory crackdowns are happening, and where cryptocurrency could go from here.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. It feels like this year cryptocurrency is everywhere, from pop culture to Wall Street. Did anyone read that article about Bitcoin I sent you? Krusty, are you broke? Yeah, all it takes is some bad luck in the Bitcoin market.

Tom Brady, have you bought any crypto? I definitely have. You know, one of my coaches, we talk about it basically every day. But it's a wild, wild ride. And signs of a crackdown are coming. In China, among central banks, and here at home in Canada too. Crypto confusion in India. The White House had proposed broad new tax information reporting requirements. The Ontario Securities Commission threw down the absolute

hammer towards Binance. Today, The Logic's digital currencies reporter Claire Brownell is here to explain the crypto roller coaster, why crackdowns loom and where it all goes from here. Hey, Claire. Hi, Jamie. How are you? Good, good. Thank you so much for coming on to the show. I have very much been looking forward to this conversation with you. And I wonder if we could start with a characterization of the world of cryptocurrency right now, because I gotta say from where I am sitting, it is looking pretty volatile. Yes, it is extremely volatile. That's an understatement. Even it's been totally bonkers. And yeah, I would say overall, there's a lot of stuff happening that's kind of silly, but also a

lot of stuff happening that's really interesting with the potential to have important long term implications. And you talked about silly, talk to me a little bit about Dogecoin. Yes. I think that definitely falls in the silly category and is also a good example of the volatility. This is actually crazy. Like I feel like I'm dreaming as I'm as I'm recording this for you guys. I'm up a thousand two hundred and thirty nine percent. It kind of looks like the bottom fell off and it's at 17 cents you guys probably wondering how i feel about this uh terrible um so if there was somebody who got all three of their u.s stimulus checks and

they invested them in dogecoin as of may 6th or 7th which was when Dogecoin was at its high point. If they sold it on that day, they would have made half a million dollars US. So that is, yeah. And then it crashed, you know, again, something that doesn't happen very often in the normal investing world is that Elon Musk, who's, you know, known as the Doge father,

likes to promote it. You know, he went on SNL. Well, it's the future of currency. It's an unstoppable financial vehicle that's going to take over the world. I get that. But what is it, man? I keep telling you,

it's a cryptocurrency you can trade for conventional money. Oh, so it's a hustle. Yeah, it's a hustle. I didn't just say that, man. And then it crashed and it's been sort of a bear market ever since. And it's worth about 25 cents today.

It's so wild. And Dogecoin, it isn't the only cryptocurrency, as you mentioned, that's seen this wild volatility. Tell me a little bit about what its more respectable cousin, Bitcoin, has looked like in the last little while? Yeah, so Bitcoin has also been basically the entire cryptocurrency sector has been, you know, on these wild ups and downs in 2021. So yeah, again, you know, in sort of mid April, Bitcoin was about $64,000 US today, it's dropped down to more like $35,000. So again, you know, that's a that's a 46% drop from its height. That's a big loss if you bought at the top. But it's also still a pretty good gain. You know, if you look at the returns over a year, the graph is going up into the right.

Okay, it's just it's insane. And so before we get into why we've seen these insane ups and downs, into why we've seen these insane ups and downs, I think we have to do a very quick explain it to me like I'm five cryptocurrency explainer. And so Claire, can you please hit me with that? Sure. So the problem that cryptocurrency solves is essentially it makes it possible to own and trade a scarce digital asset. So it's an illustration of why that's important. Let's imagine that it's before Bitcoin was invented and I decided I'm going to create my own digital currency. And I take a picture of a monopoly dollar and I send it as an email attachment to you, Jamie, and say, I just gave you one ClareCoin. And the thing about that is, you know, you download the attachment, you right click it, you can copy it 100 times. And all of a sudden, it looks like you have 100 ClareCoins, even though I only meant to send you one. So the problem that Bitcoin solves here is that it makes

it so that you can look up, oh, Jamie tried to spend 100 Clare coins. In fact, she only actually has one. You can't double spend them. You can actually verify that that is the case and everything went through with no funny business. And it does that all in a completely decentralized way through just a network of computers all performing this work of verification. And the other important thing about it is that you can't stop it because there's no government issuing it. There's no central business that's keeping track of it and that can reverse the transaction. It's what Bitcoiners call censorship resistant

and transactions are irreversible. and then talk to me about the currency part of cryptocurrency are people using bitcoin to buy stuff like a pizza yeah so the answer to that is not really definitely much less than a lot of crypto enthusiasts probably thought would be the case at this point in time. So speaking of pizza, that's sort of a famous example in Bitcoin. May 22nd is known as Bitcoin Pizza Day, because that's the day that the first commercial transaction in Bitcoin was made where somebody paid 10,000 Bitcoins for two pizzas at the time, about $41 US. So the person who delivered them thought that was awesome, cashed them out, you know, sent them to go on a trip. If he had kept them, they would be worth $346 million today. Oh my god, imagine you're that guy. Oh my god.

When I say Bitcoin, you say what? Pizza. The pizza was purchased at this Papa John's on Atlantic Boulevard. There's even a plaque on the wall with the date May 22nd, 2010, and a proclamation that Jacksonville is the home of the first Bitcoin purchase. Tim Mosbach is the general manager. It's just nice to see history being made here. Yeah. So essentially people aren't buying stuff with them right now because the price keeps going all over the place, right? So they want to maybe hold them because they don't want to be that pizza guy.

Is that what's going on? That's a big reason why it's not super useful as a currency currently. So yeah, some other issues are the fees. The fees fluctuate depending on what's going on in the network. Um, in April, the average fee for a single Bitcoin transaction, um, was just short of $63 US. So, you know, do you really want to spend that much money to buy a coffee, a pizza,

whatever it is that you're trying to buy in a day? Um, and it's also pretty slow compared to the visa network can process 1700 transactions per second on bitcoin it's more like four to seven so yeah this is known as the bitcoin scaling debate um there are various technological tools out there that are designed to improve this problem and solve it but they still have some things to be worked out before it feasibly be a replacement to the international payment system. Do you think it's more useful then to think of Bitcoin not as a currency,

but maybe like a commodity? More like gold? Or am I off base there? That's how a lot of people are increasingly thinking of Bitcoin in particular, is calling it digital gold. Both gold and Bitcoin are rare resources. Gold, for example, is universally known and accepted. You can literally store billions

of dollars on a crypto wallet, hop on a plane and exchange it anywhere. And it has some attributes that are similar to gold in the sense that gold doesn't have really sort of an intrinsic value either besides, you know, it has some uses in making jewelry and like industrial implications. But, you know, the main reason that gold is worth as much as it is today is because it's been sort of a store of value for thousands of years and people have been able to rely on that. And yeah, Bitcoin kind of similar in that it doesn't have, you know, gold Also, there's no revenue stream. There's no rents you're collecting from gold. It's just gold, right? Bitcoin, it's sort of a similar idea. because it doesn't have the deep history that gold does. And of course, we just talked about how wild the swings are, how volatile this is.

Yeah. Oh, that's absolutely right. Yes. Why has there been such a surge in popularity of cryptocurrencies over the last year in particular? It really does feel like this year something changed. Yeah, absolutely. So I think there are a few things going on. Absolutely. So I think there are a few things going on. One is just this in 2021. There's just been a constant stream of news about its growing integration with the mainstream financial system. So Tesla announcing that they had put Bitcoin on their balance sheet was, you know, absolutely huge. Tesla says that they've updated their investment policy to provide them with more flexibility to, says that they've updated their investment policy to provide them with more flexibility to,

are you ready for this, be able to buy Bitcoin. We have invested an aggregate $1.5 billion in Bitcoin. That's a public company. It's in the S&P 500. That means, you know, lots of people like investing in index funds and mutual funds now have exposure to Bitcoin, kind of whether they like it or not. In Canada, we launched Bitcoin Ether ETFs. So you can put Bitcoin in your RRSP now, just all kinds of ways that it's gotten this sort of mainstream institutional adoption that I think has given people more confidence about its long term viability. Another thing that I think is definitely going on is just there, if you're lucky enough to be working from home in the pandemic and still collecting a paycheck, you didn't have a whole lot of things to spend your money on. Didn't have a whole lot of things to do except look at your computer and, you know, read about Bitcoin and cryptocurrencies. So I think people kind of had money burning their hole in their pockets a bit. And that was fueling it as well.

I think a similar thing was going on with the meme stock phenomenon that we saw with stocks like GameStop going up, you know, huge amounts. Yeah, I was just thinking, I was just thinking of GameStop when you were talking about that. In the Dragon's Den, I'll see you next time. through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix.

I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. All right, so we've talked about some

of the reasons why cryptocurrencies have been having some ups. But as you talked about earlier, they've also been having some real lows. And I think that that's at least in part because it seems like there's a bit of a crackdown coming, even here in Canada, right? Yeah, that's absolutely true. So in Canada, to give a little bit of context, the number of cryptocurrency trading platforms, the platforms that let you exchange your Canadian dollars for cryptocurrencies, has absolutely exploded recently.

So just a few years ago, there were maybe a few Bitcoin ATMs. And then there was Quadriga, where you could exchange your Canadian dollars for crypto. Yes. And for our listeners, they might be familiar with that story. It did not end well for many, many investors who essentially got duped out of their money. The parent company of the BC-based Quadriga CX says it lost access to the cryptocurrency after the death of its 30-year-old CEO, Gerald Cotton. Cotton had the only virtual keys to those wallets. And that laptop contains the $250 million, thousands of potential Canadian accounts there, and they all might be gone for good. And, you know, these are the risks that you run when you're investing with a cryptocurrency exchange. So, you know, this is the thing about Bitcoin.

If you have what they call the private keys to your Bitcoin or your cryptocurrency, which is sort of like a bank account password, and you commit that to memory, you know, you write it down on a piece of paper, you like eat the piece of paper and swallow it, you commit it to memory forever. No one has yet figured out a way to take your Bitcoin from you if you do that. But that's really impractical for a lot of people. You know, you hear stories about people doing things like etching it on metal plates and burying it in their backyard, you know, in order to manage the crypto they have in custody. For, you know, for a lot of people, like it's more practical to outsource that function to somebody else. So there's billions of dollars sitting on cryptocurrency exchanges. But that means it's vulnerable to, you know, you're just putting the trust into those exchanges not to get hacked or run off with your money or do all kinds of nefarious things that that happened. Like with

Quadriga, Mailbox is another famous example. Right, right. So so so Canada's is trying to regulate these exchanges and to deal with these these sort of risks? Is that why we're seeing this? Yeah, that's essentially the idea. So what's happening is securities regulators in Canada in particular have stepped in and said, the activities that you're conducting fall under our jurisdiction and you need to register with us or face enforcement action. So we're starting to see there have been 50 exchanges, apparently, that have gotten in touch with the Ontario Securities Commission. There have been some foreign ones that have declined to finance the world's biggest cryptocurrency exchange recently announced that it's exiting Ontario, presumably, you know, because it was easier for

them to exit Ontario than to comply with these new rules. And I know this kind of regulation is not just happening in Canada, right? Like central banks just last week were declaring cryptocurrencies as being against the public good. And China is taking real action against cryptocurrency mining and trading activity. Bitcoin mining firm BitMining delivering 320 machines to Kazakhstan after being forced by the state energy regulator to shut down its data center in Sichuan province. We'll get to the mining part in a second, but I want to ask you about another reason why we see cryptocurrencies regulated. And that's because of their ability to be used in illegal dealings, right? Like be used by criminals. And, you know, I'm thinking of like ransomware attacks that are demanding payment in Bitcoin,

for example. And so why is cryptocurrency attractive to criminals? The reason why it's useful to criminals is because of those qualities I was talking about earlier, censorship resistance, and yet the fact that it's irreversible. So essentially, the government can't say, you know, hey, PayPal, hey, Visa, hey, MasterCard, block all payments to, you know, this, this one bank account, because we've determined that it's a it's a money launderer, or a cyber criminal, or whatever, kind of the whole point of Bitcoin is that you can't do that, that you can't block the payments.

So, yeah, that's why it's attractive to criminals. But that's also, you know, people, Bitcoiners would point out that it also helps with some things that are illegal, but that you might think are kind of good and cool, like funding protest movements and authoritarian regimes, helping refugees take their money with them while they're crossing the border, allowing a media outlet and a dictatorship to accept payments when other forms of payment are cut off, that it doesn't discriminate, right? It's going to allow some things you like and probably some things you don't like. Right, right, right. I've heard sex workers, for example, will use cryptocurrency accounts because maybe their accounts have been shut down. That's exactly right. Yeah. Okay, and finally, I feel like we should address this because it is a really significant point here. And also, when we were talking about China, that they're also cracking down on mining, I believe, because of this issue.

Cryptocurrencies like Bitcoin, they are really quite bad for the environment, hey? Yeah, so there's there's no debating that Bitcoin mining and other cryptocurrency mining consumes an absolutely massive amount of electricity. So by most estimates, it's about as much as a small country, something like Argentina in terms of how much electricity it consumes annually. And that's a big problem. One of the biggest trends in investing right now is environmental, social, and corporate governance investing. So trying to look at the overall impact of what you're investing in. And so those emissions from the Bitcoin network are a big problem for them. It's Bitcoin. Basically, they're incentivized to go wherever

energy is cheapest. Sometimes that's going to mean using renewable power like hydro in Quebec, where there's lots of Bitcoin miners, but sometimes it's going to mean firing up an old coal plant, which has recently happened in New York and Montana. It's surprising to me to think that we could be mainstreaming something so energy intensive now, given what we know about the climate emergency? Yeah, I think it's absolutely a fair question to ask. I mean, there are counter arguments will be presented things like, oh, it's about the same amount of electricity as Christmas lights use and nobody complains about Christmas lights.

And also things like, you know, where there are these solutions, the lightning network is an example of a technological solution that Bitcoin is trying to use to solve the scaling debate and, you know, reduce the amount of processing power and time it takes to power a transaction. But, you know, the fact remains that, you know, it's true now that that's how much energy a transaction takes. And that right now we're, you know, we're kind of on our last iceberg here where you know we've got power lines melting in portland in the heat at 4 p.m monday portland reached a record breaking 116 five hours later after the sun went down it was still 90 the heat buckling this highway in everson washington forcing officials to shut it down like it's not you know it's it's not a hypothetical future problem.

Climate change is a problem we're dealing with now. And I think asking, you know, is this really something we should be monkeying around with is a fair question to ask. With all of this regulation, this move to crackdown, do you think that we'll see cryptocurrency lose its value or even completely fall off the map here? I don't see it falling off the map. Some of the most interesting things happening in cryptocurrency, I think, are not the payments and not the, you know, store of value, like price going up stuff. But things like on Ethereum, which is a competitor to Bitcoin, they're experimenting

with they call it DeFi, decentralized finance, where they're basically building automated tools that are sort of the backbone of the financial system. So they've, you know, people have made exchanges that operate completely automatically without, you know, any business or person behind them that, you know, just the orders execute automatically based on software. And that's how it works. Yeah, what we've been seeing with NFTs, a lot of it is really silly. I think, you know, a lot of things like people paying $69 million for a digital work of art. Well, the world knows him as Medic Coven. I think this is a significant piece in art history.

And sometimes these things take some time for everyone to recognize and realize. But I'm okay with that. A lot of silly stuff we've seen there. but I'm okay with that. A lot of silly stuff we've seen there, but the idea of being able to create a digital work and having it hold value and scarcity, I think is really interesting. And we're just going to see, I think,

more and more applications of that going forward. And I wonder, you alluded to this earlier in the conversation as well, and I wonder sort of final thoughts today, if you could just tell me a little bit more about what you think that looks like. What do you think that a future with this kind of technology looks like for regular people? Yeah, that is such a great question. And I ask myself that question a lot. And I take, a big question I have is like people in crypto talk a lot about the potential to bring financial freedom to marginalized people and people who don't have access to bank accounts in the financial system. I kind of want to know, can we really do that? Can we, you know, there are technological and financial barriers to making that a reality. will we actually be able to remove them? And will people who don't already have money,

you know, be able to have access to some of the things about this that I think are kind of neat and cool and interesting? Or is it just going to be a play thing for people who already have money to make more money? I think that's, you know, I'd say that's one of the biggest questions that I have about where this is going to go. Okay, well, man, I could talk to you about this all day. But I hope that you will come back on and we could continue following this because this is great. Thank you so much, Claire. Thanks. Yeah, thanks for having me. Before we go today, more disturbing news on the discoveries of unmarked graves at former residential schools.

A lower Kootenai band in southeastern BC says that 182 shallow graves were discovered close to the former St. Eugene's Mission School, located near the town of Cranbrook. It was operated by the Catholic Church from 1912 until the 1970s. radar, adding to the growing tally of unmarked burial sites near residential schools across the country, including in Kamloops and the Cowessess First Nation in Saskatchewan. That's all for today. I'm Jamie Poisson. Thanks for listening to FrontBurner, and we'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.