It has been long-held advice in the investing world that if you don’t understand something, it’s best not to put money into it.
That advice looks to have gone by the wayside when it comes to the gold-rush atmosphere among retail investors for the new and growing crop of bitcoin exchange-traded funds.
The first bitcoin ETF out of the gate, Purpose Financial LP’s Purpose Bitcoin fund (BTCC), has proven wildly popular with investors despite its relatively high management fee of 1 per cent. After less than two months, it already has more than $1.22-billion in assets under management. By comparison, Evolve Fund Group’s Bitcoin ETF (EBIT), launched one day later, has accumulated less than a tenth the assets of the Purpose ETF, despite cutting its management fee shortly after launch to 0.75 per cent.
“The first-mover advantage was so readily demonstrated it was not funny,” says Yves Rebetez, an ETF consultant and partner with Credo Consulting Inc. of Oakville, Ont.
He believes most of the money sunk in bitcoin ETFs to date has been retail investors driven by FOMO – fear of missing out. “For me, people who suffer FOMO in relation to bitcoin, they should just throw 3 to 5 per cent of their money, if they have enough of it to lose, they should throw it in and forget about it.”
Besides that fear of missing out on the sizzle of the most popular form of cryptocurrency, investors are attracted to the promise of bitcoin ETFs as a potential gold-like counter to stock markets, he says.
Bitcoin ETFs also allow people to participate in the cryptocurrency market without having to create a crypto wallet, and the funds can be tucked into tax-sheltered registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
With bitcoin, Canada has cemented its status as an international innovator. It beat the U.S. with the first exchange-traded fund years ago and produced the world’s first bitcoin ETF.
So how have bitcoin ETFs fared for investors?
Since its Feb. 18 debut, BTCC’s price has swung from its $10-a-unit initial price, dipping well below that price within a few weeks and then staying above its launch price for most of the past month. Evolve Fund’s EBIT ETF has performed similarly, dipping below its initial price of $25 per unit in the first two weeks of trading to sit comfortably above that price today.
A third ETF, the CI Galaxy Bitcoin ETF (BTCX.B), launched on March 9 with a clear point of difference: an ultra-low management fee of 0.40 per cent. It’s trading slightly over its initial $10.75-a-unit price.
To add a bit of further complexity and choice for investors, there are in fact seven bitcoin ETF variants on offer, with Purpose having three (BTCC-Hedged, BTCC.B-Canadian dollar, BTCC.U-US dollar), and Evolve (EBIT, EBIT.U) and CI Galaxy (BTCX.B, BTCX.U) both offering Canadian/U.S. dollar versions.
CI Galaxy also intends to launch bitcoin-based mutual funds in an effort to grab a bigger slice of the crypto-investment pie, company chief executive Kurt MacAlpine says, part of “democratizing access to bitcoin and other digital assets.”
Other fund companies including Horizons ETFs Management (Canada) Inc., 3iQ Corp., Accelerate Financial Technologies Inc. and Arxnovum Investments Inc. have applications before regulators to list bitcoin ETFs to trade on the Toronto exchange. The ranks of bitcoin ETFs could also swell as bitcoin trusts are converted to ETFs. Ninepoint Partners LP, for example, recently asked shareholders to approve converting its closed-end Bitcoin Trust into an ETF.
Canada’s big banks have been absent in the crypto fund space to date. “Our bank, and all the other banks, sees it as very, very speculative and risky,” says Daniel Straus, director of ETFs and financial products research with National Bank Financial Inc.
“While there are certainly divisions within the bank which are happy to help clients achieve what they want to do in this space, when it comes to investability of the actual underlying asset … we see it as very akin to a highly levered product.”
Advisers generally have been slow to warm to the bitcoin funds, and most are no doubt keeping a close watch on the sector as their clients ask for their guidance.
“I have had mixed feelings about this for some time,” says Dan Hallett, vice-president of research with HighView Financial Group in Oakville, Ont. “My past research has shown – very clearly – that the more volatile the investment, the worse the outcomes for individual investors. And there is no investment I can think of that is more volatile than bitcoin.”
He has given it a second look because before the Purpose ETF launch, the only way to buy bitcoin in an investment vehicle was through closed-end funds, which traded at a premium to their net asset value and generally featured higher fees.
Mr. Hallett describes the new bitcoin ETFs as a “welcome” addition, however he worries that bitcoin itself is no longer trading like the market-independent asset it has been touted as since March, 2020, when markets crashed due to the spread of COVID-19.
Since that time, “it became significantly and positively correlated with stock market moves. In other words, it has behaved more like a turbo-charged technology stock over the past year than a decentralized uncorrelated asset.”
He says the jury is still out on bitcoin (and by extension other cryptocurrencies) as they have not been widely available to retail investors before.
“We don’t know if it will become more highly correlated with stocks over time or whether it will revert to its prepandemic behaviour as being fully disconnected from the financial markets from which it is supposed to offer diversification.”