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.
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Over the last year, the price of bitcoin has skyrocketed more than 900 percent, rising from just under US$5,000 to nearly US$54,000. The cryptocurrency’s 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, and that has kept some investors away.
Accessibility is changing quickly, however. In the last 12 months there have been a plethora of new additions to the bitcoin investment landscape, including several bitcoin trusts and the world’s first three bitcoin exchange-traded funds (ETFs).
ETFs were first established in the 1990s as an alternative investment vehicle. In the decades since then, the global ETF industry has ballooned to include safe haven asset classes like gold and silver, as well as burgeoning and 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 really began to resonate with investors following the 2008 financial crisis. Coincidentally, this was the same event that paved the way for bitcoin.
Thirteen years later, the two sectors have merged to create bitcoin ETFs. The first two, the Purpose Bitcoin ETF (TSX:BTCC) and the 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 the next month.
The goal of these ETFs is to offer investors exposure to the bitcoin market through holdings of the digital currency. Using pooled investment funds, they purchase bitcoins and hold them in a “cold wallet” or “cold storage” — an offline destination that can’t be hacked or breached.
The ETFs then track the performance of bitcoin in US dollars on a specific index.
For Raj Lala, CEO and president of Evolve ETFs, there are a few key difference between his bitcoin ETF and the others.
“A distinguishing factor for our ETF is the reference index used for EBIT,” he said. “The benchmark for the bitcoin ETF is the CME CF Bitcoin Reference Rate provided by CF Benchmarks, a highly regulated crypto benchmark administrator.”
The newest bitcoin investment tool, ETFs are often compared to the sector’s numerous bitcoin trusts. Both tools invest in bitcoin and use cold storage. Despite these similarities, Lala explained that there are differences between bitcoin trusts and ETFs.
“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, which minimizes any premium on net asset value (NAV).
“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.
Lala also pointed to management expense ratios. He said that 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 closed-end fund providers are considering launching a bitcoin ETF,” he said.
Indeed, the latest bitcoin ETF from CI Galaxy comes just two and half months after the firm launched the CI Galaxy Bitcoin Fund (TSX:BTCG.UN).
Purchasing bitcoin ETF shares through the same channels investors are already accustomed to is helping to demystify the cryptocurrency. What’s more, aside from the added diversity that ETFs offer, Canadians can also hold them 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 Lala. “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.”
Bitcoin ETFs: A growing fraction of a multi-trillion market
In a 2019 report, the Bank of America (NYSE:BAC) forecast that the global ETF market would surpass US$50 trillion worth of assets under management by 2030. A significant amount of that growth is expected to come from thematic ETFs like those focused on bitcoin and other crypto offerings.
Bitcoin has been compared to gold since its inception due to ability to store value, and this factor was on full display in the months following initial COVID-19 disruptions 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, portability and divisibility are factors associated with stores of value, and these are all exhibited by bitcoin.
But in order for the bitcoin market to keep pace with the growth it has shown so far, continued mainstream adoption is paramount. With companies like Tesla (NASDAQ:TSLA) and Visa (NYSE:V) embracing the cryptocurrency, it’s becoming increasingly palatable for all investor classes.
“Mainstream acceptance at all levels, from institutions to public companies, will help increase awareness and adoption for end investors,” said Lala.
“Investors may consider bitcoin for capital appreciation, as an alternative to traditional investments, as a complement to gold exposure and/or (to position) 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.
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