If you were to pick a word that best encapsulates the experience of the past few years, it might be “disruptive.”
One disruptive trend that seems to have caught many investors’ attention: cryptocurrency ETFs. Canada introduced the first set of cryptocurrency ETFs in the world in February. Since then, this ETF category has seen exponential growth, gathering nearly $4.6 billion in assets under management as of August 31.
Other countries are attempting to catch up: in the U.S., 16 Bitcoin ETF prospectuses have been filed with the Securities and Exchange Commission. In August, a French asset manager was granted approval to launch an ETF for European investors with a correlation to the price of Bitcoin using a basket of securities. To date, however, Canada remains the only country to have successfully launched futures-based and direct cryptocurrency ETFs, as well as inverse options.
Now, more than 10 years after Bitcoin’s emergence, why have cryptocurrency ETFs become such a popular investment vehicle?
“Cryptocurrencies have captured investors’ attention for a variety of reasons. For one, they represent a new zeitgeist for financial markets — a ‘new gold’ that is digital, decentralized and non-correlated to traditional asset classes,” said Hans Albrecht, vice-president and portfolio manager with Horizons ETFs Management (Canada) Inc. “But perhaps what’s caught most investors’ attention has been the performance. We’ve seen the outsized return potential of cryptocurrencies, albeit with significant volatility risks. For Canadian investors, ETFs have become the easiest way to chase that potential and get exposure fast to popular cryptocurrencies like Bitcoin and Ethereum.”
Prior to the emergence of these ETFs earlier this year, options for accessing cryptocurrencies like Bitcoin were limited. Investors could navigate a proliferating number of cryptocurrency exchanges to buy and sell; however, the potential for hacking, as well as the potential for losing your cryptocurrency if you forgot your password, were major deterrents for many investors. Closed-end funds also offered exposure to cryptocurrencies, but lacked intraday liquidity and could trade at premiums to the net asset value (NAV) of the fund.
The advent of the ETF option offered investors a liquid, safer and truer-to-NAV way to get exposure.
Another benefit of the ETF model versus buying cryptocurrencies directly: ETFs are eligible for use in registered investment accounts, including TFSAs and RRSPs. Bitcoin has returned more than 400% since Sept. 2020, and tax-free and registered accounts offer a potent vehicle for storing your cryptocurrency exposure.
As with any investment, returns are not guaranteed: many cryptocurrencies have experienced significant volatility and drawdowns in value, often in reaction to news about global restrictions and regulation.
“While many investors ultimately want exposure to Bitcoin or other cryptocurrencies, another option that more risk-averse investors have sought out is to own the ‘picks and shovels’ for these mineable digital currencies,” said Albrecht. “There is a growing ecosystem enabling these cryptocurrencies to function, whether it’s the digital exchanges that they trade on, the blockchain and cloud computing infrastructure that enables the transactions or even the hardware, from GPUs [graphic processing units] to semiconductors needed to mine and power them. Many of these sub-sectors and companies see some correlation to the prices of cryptocurrency, but may provide more of a safety-net given their diversified business operations.”
Some cryptocurrency boosters have dubbed Bitcoin “digital gold” due to its scarcity, durability and growing approval as an alternative currency, boosted by acceptance by major companies like Microsoft Corp., Tesla Inc. and even the restaurant KFC. The country of El Salvador has approved Bitcoin as legal tender.
While Bitcoin does not share historical significance of gold, its meteoric growth could suggest a quick ascendancy past the glittering metal: the global market cap of all cryptocurrencies in circulation is approximately US$2.25 trillion, dwarfing the GDP of most countries.
These and other factors suggest the crypto trend is here to stay, building a stronger case for the appropriateness of having cryptocurrency ETFs in an investment portfolio for a potential growth-oriented, alternative currency exposure.hile cryptocurrencies have disrupted the investing landscape, cryptocurrency ETFs have allowed more investors before to harness the investment potential for their portfolios.
Once again, Canada’s ETF industry has proven its ability to lead the way globally on investment innovation. As more cryptocurrencies emerge, there will likely be more opportunities to invest in them through ETFs and disrupt portfolios for the better.