The meteoric ascent of bitcoin has created a lot of buzz for the cryptocurrency, as well as interest from investors clamoring to enter one of the hottest markets.
Over the last year the price of bitcoin has skyrocketed more than 900 percent, from US$4,962 in March 2020 to US$53,796 today. The meteoric ascent has created a lot of buzz as well as interest from investors clamoring to enter one of the hottest markets.
Unfortunately bitcoin can be notoriously difficult to understand which has kept some investors away from the growing asset.
Over the last year there have been a plethora of additions to the bitcoin investment landscape, including several trusts and the world’s first three bitcoin exchange traded funds (ETFs).
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ETFs were first established in the 1990s as an alternative investment vehicle. In the decades since the global ETF industry has ballooned and includes safe haven asset classes like gold and silver, and burgeoning or niche sectors like airlines, psychedelics and space travel.
In August 2020, the global ETF sector saw inflows surpass US$7 trillion.
Designed to hold a variety of assets, ETFs often contain commodities, equities and currencies, or a mix of the three. This diversity across an entire market began to really resonate with investors following the 2008 financial crisis. Coincidentally, this was the same event that paved the way for bitcoin.
Now, 13 years later the two sectors have merged to create bitcoin ETFs. The first two, Purpose Bitcoin ETF (TSX:BTCC) and Evolve Bitcoin ETF (TSX:EBIT), launched a week apart in February 2021.
A third bitcoin ETF, the CI Galaxy Bitcoin ETF (TSX:BTCX.B) launched a short time after (March 9).
The goal of these ETFs is to offer investors exposure to the bitcoin market through holdings of the digital currency. Using the pooled investment funds bitcoin is purchased and held in a “cold wallet” or “cold storage” — an offline destination where it can’t be hacked or breached.
The ETF then tracks the performance of bitcoin in US dollars on a specific index.
For Raj Lala, CEO and president of Evolve, there are some key difference between his bitcoin ETF and the others.
“EBIT is the lowest-management fee bitcoin ETF currently in market with a management fee of 0.75 percent,” he said. “Another distinguishing factor is the reference index used for EBIT. The benchmark for the bitcoin ETF is the CME CF Bitcoin Reference Rate (BRR) provided by CF Benchmarks, a highly regulated crypto benchmark administrator.”
The newest bitcoin investment tool, ETFs, are often compared to the sector’s numerous trusts. Both tools invest in bitcoin and use cold storage. Despite these similarities, Lala explained how the sector’s ETFs and trusts differ.
“ETFs provide daily liquidity while closed-end funds (trusts) have an annual redemption date which is usually a one-day period investors can sell their units penalty free,” said the CEO of Evolve.
He went on to note that ETFs can also create additional shares to meet increased demand. Minimizing any premium on net asset value (NAV) as a result.
“Closed-end funds have a finite number of shares outstanding, which leads to large market price deviations from NAV when there is increased buying or selling pressure,” he said.
Management expense ratios was another area cited. According to Lala, funds are more expensive to manage, which means investors incur higher fees.
“Purchasing bitcoin through an ETF structure is far superior to a closed-end fund, thus the reason many CEF providers are considering launching a bitcoin ETF,” he said.
In fact, the latest bitcoin ETF, CI Galaxy’s, comes just two and half months after the firm launched the CI Galaxy Bitcoin Fund (TSX:BTCG.UN).
Similarly, the Ninepoint Bitcoin Trust (TSX:BITC.UN), which began trading on the TSX in late January, is considering switching its closed fund trust into an ETF. Citing several of the factors mentioned by Lala, in its March press release.
Purchasing bitcoin ETF shares through the same channels investors are already accustomed to is helping to demystify the cryptocurrency. Aside from the added diversity, holding ETFs offer, they can also be held in an RRSP and TFSA.
“Evolve’s Bitcoin ETF is a simple and efficient way for investors to gain exposure to bitcoin within the familiar structure of an ETF,” said the president and CEO. “Through EBIT investors can avoid using unfamiliar intermediaries or opening their own Bitcoin wallets to invest in the asset. No need to remember passwords or keys.”
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Bitcoin ETFs: A growing fraction of a multi-trillion market
In a 2019 Bank of America (NYSE:BAC) report, the global ETF market is forecasted to surpass US$50 trillion worth of assets under management by 2030. A significant amount of that growth will come from thematic ETFs like bitcoin and other crypto offerings.
Bitcoin has been compared to gold since its inception, and most recently it has been dubbed the new gold. Evidenced by its ability to store value. A factor which was on full display in the months following the COVID-19 disruption in March 2020.
“Bitcoin is gathering institutional interest and being viewed as an alternative to traditional investments, such as gold and a potential hedge against inflation,” said Lala. “Some analysts are suggesting cryptocurrencies could be considered a ‘safe haven’ asset since they are not controlled by governments.”
He also noted that scarcity, decentralization, fungibility, potability and divisibility as the factors associated with stores of value and exhibited by bitcoin.
In order for the bitcoin market to keep pace with the growth its shown continued mainstream adoption is paramount. With companies like Tesla (NASDAQ:TSLA) and Visa (NYSE:V) embracing the cryptocurrency it becomes more palatable for all investor classes.
“Mainstream acceptance at all levels, from institution to public company will help increase awareness and adoption for end investors,” said Lala.
“Investors may consider bitcoin for capital appreciation, alternative to traditional investments, complement to gold exposure and/or positioning as a potential hedge against inflation.”
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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
