Financial advisors ignore cryptoassets at their peril, according to the providers behind a wave of cryptocurrency ETFs.
Since Toronto-based firms Purpose Investments Inc. and Evolve Funds Group Inc. received regulatory approval to launch the world’s first Bitcoin ETFs in February 2021, total assets under management (AUM) in the nascent crypto market have ballooned — reaching almost $4.6 billion by the end of August 2021.
Elliot Johnson, chief investment officer and chief operating officer with Evolve, said the stampede has been driven by do-it-yourself (DIY) investors on the retail side, with many investment firms still eyeing developments with suspicion.
“As we work through the process, I expect to see [cryptocurrencies] included in the bulk investment model that the big shops use,” Johnson said. “This is the future of finance; the world is digitizing. You can’t ignore it anymore.”
Firms and advisors that take an overly cautious approach to an admittedly volatile collection of assets risk alienating certain retail investors, Johnson warned.
“If you adopt these platforms, you remain relevant with your future-thinking clients — whether they’re younger or tech-savvy — which is always something anyone providing services needs to be thinking about,” Johnson said.
Youth engagement was a factor as CI Global Asset Management made its first foray into crypto, according to Geraldo Ferreira, senior vice-president and head of investment products and manager oversight.
CI partnered with digital asset specialist Galaxy Digital Holdings Ltd. to launch a closed-end Bitcoin fund in late 2020. That fund merged with CI Galaxy’s newly created Bitcoin ETF in May 2021.
“We felt the launch of a Bitcoin fund would align with that overall strategy of modernization, and arguably appeal to a new generation of investors,” Ferreira said.
At the very least, Purpose CEO Som Seif said, crypto-cynics should do their own research before jumping to conclusions.
“Instead of chirping from the sidelines, go and become more knowledgeable,” Seif said. “For investors, an understanding is really important as to why you’re investing. It is volatile, and there are lots of risks, so you should own it only because you fundamentally believe in it.”
Back in 2016, Seif would have described himself as a “crypto-skeptic,” before he took a deeper dive into the category that prompted his conversion to “crypto-evangelist.”
By 2018 — not long after the price of a single Bitcoin crossed the US$10,000 threshold for the first time since its launch in 2009 — Purpose was among several providers that filed applications with the Ontario Securities Commission (OSC) seeking approval for a Bitcoin ETF, only to see those efforts rebuffed by the regulator.
Since then, Bitcoin and the blockchain technology underlying the cryptocurrency have taken a mainstream turn, dragging with them newer cryptocurrencies such as Ether, Dogecoin and Litecoin.
More important, the financial infrastructure concerning the operation, trading and custody of cryptocurrencies — missing during the previous push for regulatory approvals — had developed more fully by early 2021. One significant step in that direction was the formation of a futures market for Bitcoin and Ether on the Chicago Mercantile Exchange.
After several months of discussions, the OSC approved Bitcoin ETFs sponsored by Purpose and Evolve for launch in February 2021, followed swiftly by offerings from CI Galaxy and 3iQ Corp., as well as Bitcoin futures products created by Horizons ETFs Management (Canada) Inc.
Providers also added Ether ETF offerings in April 2021, with most investing directly in tokens of Ether, the world’s second-largest cryptocurrency by market capitalization, which is used to pay for transactions on the Ethereum network, the most actively used blockchain.
However, regulators are not the only ones who have changed their approach to cryptoassets in recent years, according to Johnson. Institutional investors and their retail counterparts are “far more educated than you might think,” he said, considering the novelty of the crypto ETF market.
“In 2017, the kinds of comments I was getting from the big investors was that they can’t look at crypto because there’s too much career risk to play in that space,” Johnson said. “Now, the conversation is that they can’t afford to not know about this stuff. There’s too much career risk to keep their heads in the sand. Everyone is taking crypto seriously now.”
The liquidity of crypto ETFs makes them a better option than the previously available closed-end funds, which traded at huge premiums over their net asset value due to excessive investor demand.
In addition, Ferreira said, investors large and small appear more comfortable achieving exposure to cryptoassets via ETFs rather than trusting digital wallets held by online exchanges.
Despite the celebrated security of Bitcoin and other blockchain transactions themselves, the cryptocurrency sphere has struggled to cleanse its reputation. It remains tainted by events such as the infamous collapse of the Japan-based Mt. Gox exchange in 2014, during which US$450 million worth of Bitcoin went missing.
Crypto-related fraud has rarely been far from the headlines since. As recently as August 2021, cryptocurrency platform PolyNetwork reported that a hacker had stolen tokens of varying digital denominations worth a total of US$600 million, although the vast majority of that amount was returned after the thief claimed the heist was done only for fun.
“The benefit of our product is that it is a convenient means of investing in crypto, and a secure one,” Ferreira said. “We’re actually holding the digital assets — not using futures or contracts — in a cold-storage facility with a custodian.”
If ETFs have helped sanitize cryptoassets for wary investors, the products may do little for the category’s other defining characteristic: volatility. In 2021 alone, Bitcoin began the year worth US$20,000, hit an all-time high above US$63,000 and suffered several double-digit corrections, including a 40% plunge in the second quarter of the year.
So far, the price of crypto ETFs has closely tracked the value of their underlying assets. However, total AUM in the category continued its upward trajectory even as Ether and Bitcoin suffered significant drawdowns, thanks to persistently large inflows.
A survey of investor and advisor sentiment conducted in the second quarter of 2021 by Horizons lends weight to the idea that DIY investors are leading the charge. Advisors reported 45% bearishness on Bitcoin compared with 52% bullishness by investors.
Dan Hallett, vice-president of research with HighView Financial Group in Oakville, Ont., falls into the bearish camp — for now. He tells clients who inquire that the firm does not make any allocation to cryptoassets.
“We just don’t see the investment case for them at this point,” Hallett said. “There’s nothing wrong with price speculation, and there have been some pretty massive profits made on these bursts in the past six months or so, but it’s more of a trade than a long-term investment, in my view.”
Still, Hallett said, the new ETFs are a welcome addition to the marketplace. And his mind remains open as the field develops: “We are always looking to learn more about [cryptocurrencies] and trying to see things from the perspective of some of the more thoughtful analysts who are bullish on crypto.”
Johnson is not worried about the volatility of Bitcoin and other digital tokens, predicting the category will weather any future crashes in value of cryptocurrencies.
“I don’t think anyone looks at this and says they want [cryptocurrency] to be as reliable as a bond,” Johnson said. “It’s highly volatile at the moment, but my personal opinion is the volatility becomes less and less over time. This is something [clients] need to be careful about.”
Johnson would love to expand Evolve’s ETF offering to include other emerging cryptocurrencies, such as Litecoin or Cardano, but said the short-term prospects are not good.
“There’s some base-level financial industry plumbing that has to be built,” Johnson said, noting that no futures market exists for any digital tokens other than Ether and Bitcoin.
“As those pieces develop for others, we certainly will pay close attention for ways to build new products,” Johnson added. “This is a technology that is here to stay.”