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Cryptocurrency has been one of the most divisive asset classes to come along in recent memory.
True believers have preached the advantages of this “revolutionary” financial tool and celebrated as the value of bitcoin and other crypto assets soared. However, most of the investment community has treated crypto with skepticism and even disdain. They felt vindicated as the sector dealt with scandals and price collapses.
Despite major setbacks, such as Sam Bankman-Fried’s cryptocurrency exchange FTX filing for bankruptcy late in 2022, the sector has staged a remarkable comeback. The trading price of bitcoin has returned to highs not seen since the summer of 2022 as support for the asset class has proven to be surprisingly steadfast.
The sector has also been boosted by reports the U.S. Securities and Exchange Commission is close to approving the first exchange-traded fund (ETF) based on the spot price of bitcoin.
Even as crypto shows its mettle, most of Canada’s investment industry has avoided the sector, questioning the real value of the assets and their suitability for clients. The question now is whether the recovery of bitcoin’s value – and the growing stability of the sector – has led to increased acceptance among investment advisors.
“I would say advisor interest is both strong and increasing,” says Vlad Tasevski, chief operating officer and head of product at Purpose Investments Inc. in Toronto, which introduced the world’s first bitcoin ETF in February 2021 and now offers four ETFs based on cryptocurrencies.
“Since last year, when the FTX debacle started coming out and other challenges in the sector, we have seen stickiness and a high level of conviction from existing shareholders,” he says.
Through this period, the company has seen net inflows into its crypto funds, he says, noting that Purpose’s funds have never had any technical “issues,” despite the turbulent times in the industry.
Mr. Tasevski says Purpose has seen an increase in interest, especially since August with news that the SEC is potentially getting closer to approving a spot bitcoin ETF.
“We’re seeing an increase among all investor types – from retail investors to advisors and institutions – and a definite pick up in the last month and a half,” he adds. “Advisor interest is greater than the previous bull cycle in 2021.”
That’s in part because there was a more conservative view in the head offices of investment firms at that time, he says.
“Fast-forward to now, with the ETFs showing their value and reliability, it has made advisors and head offices much more comfortable with the product,” he says.
The firm is getting more inquiries from advisors about how to incorporate crypto funds into the overall strategy for clients, he adds.
While Purpose is pleased with the response to its crypto funds, there’s still plenty of skepticism about the sector from most advisors.
“My opinion is that as a value investor, I cannot make a cogent financial case for owning crypto-related investments in client portfolios,” says Jason Del Vicario, portfolio manager with Hillside Wealth Management at iA Private Wealth Inc. in Vancouver.
“Cryptos do not yield any economic value but for the hope that someone will pay a higher price for the asset. This, by definition, is pure speculation. We do not speculate.”
Mr. Del Vicario says that while he has no plans to include crypto in client accounts, if that were to change, he would limit the weight to a maximum of 1 to 3 per cent of a portfolio. He also notes that if he were to own crypto personally, he would do it directly via “cold storage” – that is, with passwords stored offline.
“I also would never lend out my crypto to earn interest as this has been a land mine for crypto investors,” he says.
He adds that if his firm decided to enter the sector for clients, the most sensible way would be via ETFs, but he also has concerns about the structure of those funds.
“Fees can be high, they can often trade at a discount to net asset value, and it’s possible that they, in turn, could lend out the crypto. So, you’d want to make sure that the ETF is backed by ‘physical’ crypto and not derivatives.”
Focus on long-term potential
Many other advisors have a nuanced view of bitcoin and related assets.
“I am a definite believer that cryptocurrency is here to stay,” says Mary Hagerman, senior portfolio manager and investment advisor with The Mary Hagerman Group at Raymond James Ltd. in Montreal.
“It is slowly finding its way into the mainstream financial system, and I think it will become a legitimate currency at some point in the future and a recognized store of value. How long that will take is anyone’s guess.”
Ms. Hagerman says that, for now, she doesn’t hold crypto assets in her discretionary portfolios because they’re just too volatile.
“Many of my clients would not be comfortable holding such an investment,” she says. “Any clients who might want cryptocurrency always have the option of buying publicly traded investments [such as ETFs] in these assets outside of my discretionary portfolios.”
She also notes that as with all thematic investments, she believes that investors who buy crypto should have a strong conviction in its long-term potential to build wealth and be careful with portfolio weighting, making sure to rebalance the position and take profits on an upswing.
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