Famed U.S. investor Warren Buffett blasted bitcoin as “probably rat poison squared” a few years ago. Despite his comments and bitcoin’s trademark volatility, the world’s most popular cryptocurrency has been gaining more respect.
More U.S. institutions and notable investors – from Bill Miller to Paul Tudor Jones and Stanley Druckenmiller – own bitcoin as digital gold. U.S.-listed Microstrategy Inc. (MSTR-Q) and Square Inc. (SQ-N) have moved cash into bitcoin in their corporate treasuries, while Massachusetts Mutual Life Insurance Co. bought US$100-million in bitcoin for its general investment fund. Here in Canada, some fund managers are finding ways to offer investors exposure to this nascent digital asset as well.
“Basically, the dam has been broken,” says Felix Narhi, chief investment officer (CIO) and portfolio manager at PenderFund Capital Management Ltd. “We’re leaning to the bullish story [on bitcoin], but we are still cognizant of the risk.”
The digital asset’s notorious swings were evident on Mon. Jan. 11, with a 20-per-cent sell-off on the heels of a parabolic climb to a record high of over US$41,000. It has since clawed its way back to the US$36,500-level.
“Bitcoin is not a big bet for us, but having exposure in the early innings makes a lot of sense,” Mr. Narhi says. “We can’t own it in our mutual funds, but buying the stock of a company in which a big chunk of its value is in bitcoin is fine.”
Pender U.S. All Cap Equity Fund, which Mr. Narhi manages, owns electronic-payments processor Square and Microstrategy, a business intelligence software provider and the largest U.S. corporate holder of bitcoin. Microstrategy’s stock, acquired last autumn for US$162 a share, has surged to about US$578. “Most of that run is due to bitcoin,” he says.
The fund’s initial exposure began in 2017, with shares of Frmo Corp. (FRMO-OTC), a U.S. investment holding company headed by value investor Murray Stahl. Frmo has a stake in Digital Currency Group, which runs Grayscale Bitcoin Trust (GBTC-OTC) and other crypto funds and also owns equipment to mine cryptocurrencies.
Another bitcoin bet, Mr. Narhi says, is Canadian-listed Bigg Digital Assets Inc. (BIGG-CN), which is held in Pender Small Cap Opportunities Fund. Bigg has two businesses – one owns the Netcoins crypto exchange, while the other sells software and services to governments and law enforcement agencies to track down bitcoin-related criminal activities.
Bitcoin’s well-known attraction stems from being a store of value given its limited supply amid excessive money printing by global central banks, but there is also its potential utilitarian role in a global settlement network, he adds. “It could be a new payments system with far less friction between central banks and large financial institutions. … But lots of things have to happen before we get there.”
Meanwhile, the decentralized digital coin has gained traction in emerging-market countries such as El Salvador and Lebanon as their governments “confiscate and inflate the value of their main currencies,” Mr. Narhi says.
Greg Taylor, CIO at Purpose Investments Inc., is also bullish on an emerging crypto asset that differs from central bank currencies. “Bitcoin is by far the biggest, … but [another cryptocurrency] may be the winner.”
Given the volatility of cryptocurrencies, it’s also a less risky play to buy stocks of businesses that can earn profits from them, Mr. Taylor says.
Purpose Global Innovators Fund, which he co-manages, plays bitcoin and other cryptocurrency assets by owning shares and warrants of Canadian-listed Voyageur Digital Ltd. (VYGR-CN), a U.S. crypto-asset broker that plans to expand to Canada.
But Coinbase Global Inc., the biggest U.S. cryptocurrency exchange, is expected to go public this year and that could provide an attractive public valuation that may benefit Voyageur when comparing them, Mr. Taylor says.
In the past, Purpose Investments’ funds have had exposure to bitcoin through Grayscale Bitcoin Trust, which trades like a closed-end fund, but units in that fund have since been sold. “Because it trades at such a high premium to its net asset value, it’s really risky,” he says.
Canadian-listed closed-end funds, such as 3iQ Corp.’s The Bitcoin Fund (QBTC-T) and CI Galaxy Bitcoin Fund (BTCG.UN-T) from CI Global Asset Management, also offer exposure to the digital currency. Ninepoint Partners LP has also filed a prospectus to list a similar offering called Bitcoin Trust.
Like Grayscale Bitcoin Trust, “if you buy [Canadian bitcoin funds] at a big premium and they trade down to a discount just from the normal bid-ask spread in the market, you can lose a lot of your return,” he says. “And they don’t track as well with a high correlation to the underlying commodity.”
With some Canadian firms now vying to launch a pure-play, bitcoin exchange-traded fund (ETF), “that will be really exciting when that occurs,” Mr. Taylor says. “We are cautiously optimistic that something will happen.”
Meanwhile, ETF provider Accelerate Financial Technologies Ltd. plans to launch its OneChoice Alternative Model Portfolio ETF on Jan. 27. Its holdings will include different strategies, ranging from private credit to alternative currencies that include a 10-per-cent allocation to bitcoin.
That bitcoin exposure will initially come from investments in Canadian closed-end funds and transition to a bitcoin ETF when available, says Julian Klymochko, chief executive officer and CIO at Accelerated Financial Technologies.
“I have always been bullish on bitcoin, specifically, and not really other cryptocurrencies,” Mr. Klymochko says, adding that his view stems purely from a “quantitative perspective” for portfolio diversification.
“If you look at any time frame – three, five, or 10 years – bitcoin blows every asset class out of the water on an absolute return and risk-adjusted return basis ... even though it is a highly volatile asset,” he says.
The key to diversification is having return streams that exhibit low correlation – as measured over five years – to traditional asset classes, and bitcoin fits the bill, he says. “The numbers tell me that it must be owned.”
As bitcoin is still a high-risk asset, a low single-digit allocation makes sense for investors, but they “need to stick with it during bear markets,” he says. “In 2018, a lot of investors bailed, but that turned out to be a mistake. Selling bitcoin at US$5,000 to US$6,000 was a bad idea. Look at where it is now.”
During the 2018 bitcoin bear market, Mr. Klymochko founded Red River Capital Corp., a TSX Venture Exchange-listed capital pool company whose mandate was to complete a merger with a cryptocurrency company. It is now in the process of finalizing a transaction with Edmonton-based Bitcoin Well Inc. (formerly Bitcoin Solutions), whose main business is operating bitcoin ATMs.
“There are plenty of ways to play the bitcoin trend,” says Mr. Klymochko, who is now chairman of Bitcoin Well. “I recommend exposure to the underlying bitcoin, but bitcoin and cryptocurrency companies may also do well in the future.”