Pile of cryptocurrency coins
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This article appears in the May 2021 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

Canadian investment firms are taking a cautious approach to Bitcoin and other cryptocurrencies as client interest in the space increases and new products offer retail investors easier access to cryptocurrencies.

Financial advisors are divided on cryptocurrency’s place in client portfolios. Some advisors avoid digital currencies altogether while others embrace the investments — but only for certain clients and with limited exposure.

“We’re incorporating ETFs backed by Bitcoin in RRSPs and TFSAs,” said Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc. “If [cryptocurrency prices] are going to go where you think they will go, you would want [those investments] to be in a tax-free environment.” Zagari said he recommends a 1%–5% position in cryptocurrency as a long-term holding for clients whose portfolios are already on track to meet financial goals.

Meanwhile, Peter Guay, a value investor and portfolio manager with PWL Capital Inc. in Montreal, said he doesn’t see a place for cryptocurrency in most client portfolios: “There are no tangible cash flows around which to value [cryptocurrency].” However, a small position in crypto could be appropriate in a client’s personal account if it helps them “be more disciplined” with their core portfolio, he said.

Clients may be interested in cryptocurrency for a number of reasons. They may believe in the potential of the blockchain technology that underpins cryptocurrency, or they may want to use crypto as a hedge against traditional currencies or as a means of portfolio diversification.

But the main driver of client interest in cryptocurrency seems to be the potential for outsize growth. In early May, Bitcoin was trading at around US$57,000, almost doubling its value year-to-date and up by more than 500% year over year.

“When any asset class goes up in value so quickly, like in the past year, there’s obviously interest from a lot of clients,” said Peter Pomponio, vice-president of Assante Capital Management Ltd. and owner of Assante’s Dorval office in Montreal. Pomponio said he’s comfortable with a 2%–3% allocation to cryptocurrency or crypto-related products for clients with a high risk tolerance. “I am firmly a believer in cryptocurrency, but in terms of the volatility of the asset class or currency, it is definitely not suitable for most of my clients.”

Investing in cryptocurrency has become increasingly accessible to Canadian investors. In late 2019, Toronto-based 3iQ Corp. launched the closed-end Bitcoin Fund on the Toronto Stock Exchange. Beginning in February, several Canadian asset managers — including CI Investments Inc., Purpose Investments, Evolve Funds Group Inc., 3iQ and Ninepoint Partners LP — launched ETFs investing in either Bitcoin or Ethereum, another digital currency.

Crypto ETFs have been a hot commodity since hitting the market. In April, Canadian cryptoasset ETFs attracted $1.3 billion in flows, more than doubling the category’s total assets under management to $2.5 billion.

These products offer investors exposure to digital currencies without having to buy cryptocurrency directly through an exchange and to hold it in a “digital wallet.”

“The [cryptocurrency] funds are filling a void,” Pomponio said.

Investment Executive asked 14 major Canadian investment brokerages whether they allow clients to have cryptocurrency holdings in any form. Eight do, one doesn’t and five did not respond by press time. No firm indicated that it facilitates direct ownership of cryptocurrency.

RBC Dominion Securities Inc., for example, offers clients exposure to cryptocurrency via ETFs and listed closed-end funds, but does not offer those funds in managed or discretionary accounts. “We continue to actively monitor this policy and will make the necessary updates as needed,” the firm stated.

CI Assante Wealth Management stated it allows clients to have cryptocurrency exposure through products approved by an investment committee.

IGM Financial Inc. stated that while cryptocurrency products are not on its shelf, its advisors “can source specific investing options for their clients, if requested.”

Edward Jones, meanwhile, doesn’t allow clients to hold cryptocurrency in any form. “Cryptocurrencies are highly speculative and not aligned to our investment philosophy,” the firm stated.

Cryptocurrencies remain a highly volatile investment. According to a study published this year by the CFA Institute, Bitcoin has experienced six bear markets of more than 70% since 2010. The biggest was a drop of 84% between December 2017 and December 2018. However, the report suggested the relative volatility of Bitcoin has been declining in recent years — a trend the authors anticipate will continue.

Neil Bosch, director of wealth management and a portfolio manager with Richardson Wealth Ltd. in Edmonton, said he welcomes the accessibility that new cryptocurrency products offer, but he’s concerned that retail investors “are buying into the space without knowing the full risk” — especially if they don’t have an advisor.

“Markets trade between fear and greed, and right now, we’re in a greedy stage,” Bosch said.

Nevertheless, the development of blockchain ledger technology has been “fascinating” to watch, Bosch said: “[Blockchain] really will change how we all transact commerce in the future.” He has included crypto products in client portfolios in “a limited capacity if [clients] can handle the risk.”

Keith Costello, CEO of the Canadian Institute of Financial Planners, said advisors “have a responsibility to find out what’s going on [with cryptocurrency], just as they would any new type of technology. They should be keeping themselves up to date.”

When considering investments in the crypto space, Costello said, advisors need to follow the same product and client suitability steps they would follow with other new investment opportunities. And those opportunities may extend beyond digital currencies, he suggested: “There are whole new companies building on blockchain technology that you can consider.”

In August 2020, the Canadian Securities Institute launched a course on investing in Bitcoin to help advisors understand the cryptocurrency and answer questions from clients. The new course, which is already being updated to keep up with the evolving cryptocurrency space, has garnered a fair amount of attention so far, said Marshall Beyer, senior director with CSI Global Education Inc. in Toronto.

“I get the sense that a lot of people in our industry wish crypto never existed,” Beyer said, noting that cryptocurrency is a new and highly volatile investment class, and some advisors may be concerned about putting clients into an investment where “the bottom falls out.”

Nonetheless, advisors need to be prepared to answer clients’ questions about crypto, Beyer said. If those questions “aren’t getting answered by advisors, and [clients] are not able to trade or invest through their advisor,” he said, “then they’ll go elsewhere.”