Jordan
If you watched basically anything on television over the past winter, you you may have felt like you were about to miss your big opportunity to get extremely rich.
Audio Clips of Crypto Investors
I’m getting into crypto with FTX.
You want to make history, you got to call your own shots.
Sometimes the future is right in front of you if you’re ready for it.
Jordan
And given what happened next, I sincerely hope that you did miss that chance.
News Clip #1
An estimated 200 billion has been wiped from the broader crypto market just since last Friday.
News Clip #2
Coinbase, one of the biggest crypto trading platforms, now says it’s laying off 18% of its workforce.
News Clip #3
The largest crypto exchange finance paused withdrawals briefly. Another, Celsius, froze withdrawals, meaning investors can’t take out what’s left of their money.
Jordan
One of the companies hoping that you would dash into the cryptocurrency space after seeing those ads is called Wealthsimple. It is a company that began with the goal of making investing and longterm wealth building, accessible to millennials. It’s mostly done a really good job of that, but crypto presents a change of course. Yes, this is a story about how and why Wealthsimple got into crypto. But it’s a story much bigger than that. As cryptocurrency investing moves into the mainstream, how do more traditional investment houses balance the opportunity it offers in terms of new clients and huge volumes? With the volatile downsides that are so clearly evident when crypto value evaporates, do you want your bank or your broker pushing the next big thing? If so, what kind of duty do they have to accurately caution you about the risks you’re taking? And when a huge chunk of the money that those coveted new clients brought to companies like Wealthsimple goes poof, what happens next?
I’m Jordan Heath-Rawlings. This is The Big Story. Jacob Lorinc is a business reporter with the Toronto Star. Jacob, how’s crypto doing these days?
Jacob Lorinc
Not very well. Things have been tough in the crypto world.
Jordan
Well, this is a story, your story that we’re discussing today is kind of tangentially related to the crash that’s going on now, because Wealthsimple is one of a number, I guess, of companies that really pushed mainstream commercials about this stuff.
Jacob Lorinc
Yeah, that’s right. They’ve really learned to love crypto over the past few years. And a year ago, it was pretty obvious why crypto was everywhere. It’s booming. Not that it isn’t everywhere now, but we’re sort of seeing the other side of that now.
Jordan
Oh, yeah. And this is why I wanted to talk to you about this story in particular, because crypto obviously has nothing to do with where Wealthsimple came from. How did it begin? What was it when it started?
Jacob Lorinc
Yeah, for sure. So, way before crypto was even a thought for banks or brokerages, Wealthsimple was founded back in 2013, 2014 by a very young entrepreneur named Michael Katchen, who grew up in Toronto. He had been working at Ancestry.com actually in Silicon Valley. And one day, at some humiliating age, he was like 25 or 26 years old, he just sort of picked up and left to bring to life this startup idea that he’d had for a while and that turned into Wealthsimple. The idea was to sort of bring in young people, mostly millennials, into the world of investing in kind of a safe way. Wealthsimple was sort of supposed to be this guide to help people really sort of like grow their financial future. Through Wealthsimple, you could open TFSAs or RSPs and buy into pretty safe kinds of investment funds. So like exchange traded funds like ETFs and index funds that were pretty passive and they’d help you grow your wealth over a very long time horizon. And that’s all pretty normal for a start up in the financial space.
But the thing that was different about Wealthsimple was its business model, which at the time was pretty revolutionary. So Wealthsimple was based almost entirely on roboadvisors, which let investors open accounts very quickly online, with not a lot of manpower needed on Wealthsimple’s end. And as a result, they could charge quite competitive rates for clients to access investments. They had a pretty low cost system and it let them really undercut the banks that had managers associated with all their clients and had to charge a bit more. And so as a result of this kind of competition, Wealthsimple’s growth really shot up really fast and they just got bigger and bigger. And obviously, when a company gets bigger, that comes with a lot of change.
Jordan
What kind of change came to Wealthsimple?
Jacob Lorinc
So even before the pandemic, Wealthsimple had started developing ambitions to create really easy access investment strategies for its clients, just to make it as simple as possible to invest. And so in 2019, they finally created this app called Wealthsimple Trade, and they had been thinking about it for a while. And it’s this app which allows clients to buy and sell stocks at the click of a button. It’s almost like playing Candy Crush or just something on your phone. I have the app, it’s remarkably easy to use, you load it with money and you can buy shares in Shopify or an Apple in 2 seconds. This was a big change for Wealthsimple. It’s not totally different from the kinds of start ups you see in the U.S. that then became big companies like Robinhood. And it was smart move for Wealthsimple too. It wasn’t always so easy to get that kind of access through big banks like TD or BMO. And a few years later, Wealthsimple created a parallel program just to sort of build on this called Wealthsimple Crypto, which allows you to do the same thing, but with cryptocurrency. So that change started to happen before the pandemic really accelerated in the subsequent years.
Jordan
So before we get into kind of the ethics and the strategy of this and the business model. How good has this been–the shift into stocks and then crypto? How good has this been for Wealth Simple’s business? Can we quantify that?
Jacob Lorinc
Yeah, it’s been a huge success and Wealthsimple is it’s owned privately by a company called Power Corporation, I should say, which is this holding company that owns, I think, like a 40, 30, 40% stake in Wealthsimple. And so there aren’t a lot of quarterly disclosures that give us insight into the company. But we do know that in 2019, when Wealthsimple first launched Wealthsimple Trade, the company had about 175,000 clients across the board. Fast forward two years later after a year of pandemic and the company had grown to 1.6 million clients. A year later, when I had last checked to write this story that I put out a few weeks ago, the company had grown that number by another million. Now it has 2.5 million members. So in three years you’re seeing this percentage increase of about 1300%. So incredible growth. And with that growth, you’re also seeing the amount of money it has managed really going up too. So it’s assets under management, which is the amount of client money that the company oversees. It has about 18.8 billion. That’s up from 9.5 billion last year. So really exponential growth.
Jordan
Are we able to tell how much of the business model is cryptocurrency? Because that’s what we’re going to discuss specifically.
Jacob Lorinc
Yeah, it’s really hard to say. They don’t publicly report the crypto platform’s revenue or size of operations. And I don’t know that it is the dominant part of Wealthsimple just given all the sort of mainstream investment opportunities it gives to clients. But when it comes to crypto selling in Canada, it should be noted that Wealthsimple has a bit of a first mover advantage because it’s the first regulated crypto exchange in the country and it has a really big brand recognition. So it’s sort of inevitable that they’re bringing a lot of investors into crypto through their program. We’ve recently seen just a surge in popularity in cryptocurrency and it’s a big market now with very few companies–Wealthsimple being one of the few to take in all this business.
Jordan
How do they market it to potential customers? Can you give me examples?
Jacob Lorinc
Yeah, so they put a lot of money into advertising their crypto platform. This is not unlike what we’ve seen across a lot of fintech companies and crypto exchanges over the past few months. Over the past year, it feels like everywhere I look I’m seeing a crypto ad for something and Wealthsimple’s part of that by virtue of being a Wealthsimple client. What even prompted me to write about this in the first place was that I noticed over the past year that my inbox had been flooded with promotional discounts and advertising for Wealthsimple crypto. You know, I’m always getting ads that will say things like 100 dogecoin are waiting for you, referring to a certain kind of crypto. All these things that are telling me that if I join Wealthsimple crypto now, I’m going to get some kind of discount. It’s going to be beneficial in some way. So we’re seeing a lot of sort of like carrot and stick kind of strategies being used by the company.
Jordan
Is there a problem with that? Honestly? I mean, it’s a product they offer. I got an entire Gmail inbox for offers from the Bay and Old Navy and Best Buy every time they have a new product.
Jacob Lorinc
Yeah, and that’s absolutely fair. And I think that’s what they argue. They say it’s a free market, we’re a fintech company, and this is part of what we’re doing, which is they’ve always talked about wanting to democratize the investing world and bring access to these assets directly to the people, remove the barriers to investment. And I don’t think that there’s necessarily something that is innately wrong with doing that. But it is a pretty stark change for a company that prided itself at its founding as a place for safe investing, for young people to grow their wealth over the long term. As we know with crypto, there’s never a better moment than now to recognize this. It is an incredibly volatile investment, tons of people lose money on it all the time. And it’s something that if you are a prudent investor with the goal of generating wealth over the long term, I don’t know that crypto is the way to go. It’s something that people honestly gamble on. It’s something where if you’re feeling lucky, you put a bit of money into crypto and you see what happens next. And nobody, not even the founder of Wealthsimple Michael Katchen would say that that is smart investing.
Jordan
You mentioned that they’re the first regulated crypto exchange in Canada. What does that mean? And then who’s their competition? Like, can I get RBC or Scotia Bank to do this for me as well?
Jacob Lorinc
Yeah, they are one of the first regulated crypto exchanges and they’re still one of the only regulated crypto exchanges. So you can’t access crypto through the big banks. I believe that Wealthsimple is one of eight exchanges that is registered at least in Ontario to sell individual crypto assets.
Jordan
And what does that regulation mean?
Jacob Lorinc
So what it means is that you are entitled to give investors access to individual cryptocurrencies, whether that’s bitcoin or ethereum. If you want to buy one bitcoin, you have to get it through an exchange that is regulated. At least that is sort of the legal context in Canada. And the regulatory system is so patchwork in the country that it wasn’t totally obvious with Wealthsimple on how to get regulated to begin with. And they sort of had to go through certain exemptions and get certain access that wasn’t sort of inherently there to begin with from both the federal government and the provincial government in order to be able to operate. And it’s so new. I should say that Wealthsimple is still one of the few places to be regulated as a crypto exchange. It’s not something that the banks have moved towards yet. And I think that regulations are so ever evolving in the crypto space because it’s still a very new thing that perhaps these banks are waiting a little bit to see what the regulatory system will look like in, say, a year or two years.
Jordan
So how does Wealthsimple actually make money during this process when people are buying and selling crypto?
Jacob Lorinc
Yes, they make their money through transaction fees. Every time a user buys or sells cryptocurrency, the company will either collect a 1.5% or 2% commission fee from that exchange. So if I buy one bitcoin or if I buy, say I buy bitcoin worth $1,000, Wealthsimple will earn either between $15 and $20 of that transaction.
Jordan
So they have a vested interest in keeping transaction rates high. What do critics think about that, as you pointed out, such a volatile space?
Jacob Lorinc
Yeah. So they think that essentially what this is doing is that it’s making money off very risky bets that are pushed onto young investors. And while Wealthsimple does a lot of due diligence to say on its website that it’s not necessarily encouraging people to buy into crypto, that it’s merely making it available, the fact that you get so much advertising around, well, simple crypto and it’s made so incredibly easy to buy into, it’s hard to avoid it. And I think there are a lot of people who are sort of naturally inclined to make these kinds of bets. So you’re hearing critics say that this is a risky thing to give to early stage investors. You know, if you want to help them grow their wealth, this is not really the way to do it.
Jordan
In any of the communications that you’ve gotten from Wealthsimple kind of urging you to invest in crypto? Is there any, maybe disclaimer is not the right word, but any discussion of the fact that, like, hey, heads up, this is far more volatile than the investment funds you’re usually getting from us.
Jacob Lorinc
Of course. Yeah. And Wealthsimple is no different. They do disclose that it’s risky. To Wealthsimple’s credit too, I think that they go beyond that too. And they have a blog on their website where they give a lot of investment advice and they say to people, you’ve got to be careful when you’re investing in this stuff. But it does almost beg the question, if they are so concerned about investing in crypto, why are they making it so easily available to people? It’s true that whenever I get emails from them, somewhere towards the bottom of the email, they advise me to do my research before I make this investment. But that’s after telling me all the good things about these investments.
Jordan
Did you ask the question that it begs to Wealthsimple, like, if this stuff is so risky, why are you pushing it so hard?
Jacob Lorinc
I believe so. I don’t know that I bought a direct response. They have written about this on their site and they’ve effectively said that they essentially believe that they’re making it accessible to people. I think that there is sort of a belief that crypto is here to stay. It’s something that people are going to invest in. If they’re going to invest in it, wouldn’t you want them to make those investments at a place like Wealthsimple that is relatively well protected rather than a somewhat shady crypto exchange that might collapse one day and lose all your money? I think that one of the lines that they would use would be something along that is that they are a responsible company and that if you’re going to invest, maybe this is the place to do it, where you have all these disclaimers and all this sort of education around buying into a crypto. So I think that’s sort of the tone that I was getting when I spoke with them before.
Jordan
You wrote this piece a couple of weeks ago. As we kind of mentioned, off the top, since it was written, the crypto market has continued to dive. I think it’s in one of its lowest points in quite a while. What does that do to a company like Wealthsimple, who has moved so heavily into this space over the last little while?
Jacob Lorinc
Yeah, so I think that has been tough for the company. And not just crypto’s collapse, but just the collapse of the stock market in general over the past few weeks. We’re seeing stocks take a real downturn and Wealthsimple has built up this whole business over the past two years on a really positive stock market that’s encouraged people to come in and encourage people to come to the company and say, I’m seeing my friends who bought into Tesla or bought into Bitcoin and now their funds are through the roof, I’m going to do the same.
Right now we’re seeing the opposite. We’re seeing people panic sell and try to get out of the market as fast as possible. Sometimes companies like these, they can be a bit volatile because it depends on consumer sentiment and how they feel their investments are doing. And I’m sure that’s not easy for Wealthsimple right now. And we saw recently that Wealthsimple actually they put in a hiring freeze on how many people they were going to bring into the company over the next year. And that points to a company that is kind of hunkering down right now and trying to weather the storm. In fact, we just found out last week that the company laid off 159 employees, which amounts to roughly 13% of its staff because of the changes to the market conditions. So we can really see how this has been having an effect on the company.
Jordan
The last thing I want to ask you about is kind of a more philosophical question as we look towards the future. You mentioned it’s not just crypto, it’s also the stock market that has taken huge hits. And I think a lot of the time when we talk about stock market collapsing, we think of people who are already pretty financially well off and have some money to put in the markets and are able to hold the dip, buy the dip, whatever. But companies like Wealthsimple that have made their business on kind of bringing trading to the people. They’ve got a ton of clients who can’t afford this kind of cratering. What happens in that case? And what are the risks going down the road as volatile currencies like cryptocurrencies become more ubiquitous?
Jacob Lorinc
Yeah, for a lot of young investors, I think that this has been quite a sobering moment. I think that the era of pandemic investing is over, at least for now. Over the past two years, we saw people’s investments skyrocket on these incredible bull market runs that really brought a lot of wealth to a lot of early stage investors who hadn’t really seen a crash before. And now we’re getting the other side of that. We’re seeing it all come down. And I think that is going to be tough on a lot of investors. There will be some who, if they have a long term investing horizon, hopefully they’ll see their funds go up again and they’ll recover. But I mean, with the advent of this kind of day trading and this easy access, wealth simple trade, crypto kind of exchanges, we’ve also seen a lot of people make some pretty big bets on a few stocks or a few pieces of crypto. And I think there are some people who may have lost a lot of money through this and I think that’s going to be really tough for a lot of people.
Jordan
Is there a lack of education around this, just in general, with the super quick rise of these currencies that leads people to end up in over their head?
Jacob Lorinc
Absolutely. Realistically. We’ve never really learned the underlying value of bitcoin or crypto. And there are a lot of people who are incredibly enthusiastic about crypto, who I’m sure will give me flak about saying that. But it’s always been an incredible mystery, these kinds of assets. And as a result, I think that makes people really vulnerable and they don’t really know much about what they’re getting themselves into. They’re following the hype. They’re following people who are pushing it on them and telling them that this is the next big thing. Crypto is the way of the future. You’d be dumb to not get in now. And so I think that there are a lot of people who are buying into that. They’re not following any sort of like sober education around how to invest and as a result, they might be losing a lot of money.
Jordan
Jacob thank you for explaining this to us today.
Jacob Lorinc
Thanks for having me.
Jordan
Jacob Lorinc of the Toronto Star. That was The Big Story. For more, head to thebigstorypodcast.ca. Find us on Twitter at @TheBigStoryFPN. Talk to us anytime via email. Hello at [click here!]. And of course you can call us 416-935-5935. Leave us a voicemail, ask us a question, suggest a story, whatever you like.
Thanks for listening. I’m Jordan Heath-Rawlings. We’ll talk tomorrow.
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