Two years ago, crypto mania took hold in the Canadian ETF universe as new cryptocurrency products caught the imagination of investors. Fund managers touted crypto ETFs as a secure way to hold these digital assets, which had made impressive gains.
As it turns out, most of these funds have made money only for the sponsoring companies, generating millions of dollars in management fees on billions of dollars in inflows. Meanwhile, disastrous market losses resulted in assets of Canada’s cryptocurrency ETFs shrinking by close to $6 billion by the end of 2022 from their late 2021 peak.
The new year brought some relief, as bitcoin prices spiked nearly 40% by early February, while ether was up more than 30%. In January, crypto ETFs had their strongest month since August 2022, bringing in $105 million.
However, crypto investors’ renewed enthusiasm should be weighed against the fact that wild monthly swings in either direction are part of the asset class’s price history.
Given the extreme volatility, it’s difficult to draw conclusions from short-term periods such as one month or 12 months, said Nick Kuriya, vice-president and head of crypto with the Toronto-based parent company of fund sponsor Purpose Investments Inc. “Most of our investors are taking a longer-term view on the asset class.”
Referring to bitcoin’s price history, Kuriya said, “yes, there’s been lots of volatility but it generally appreciated in value. And that’s in contrast to any [traditional] currency that’s out there.”
Most crypto ETFs hold either bitcoin or ether, the two largest and best-known cryptocurrencies. Three funds — the CI Galaxy Multi-Crypto ETF, the Evolve Cryptocurrencies ETF and the Purpose Crypto Opportunities ETF — hold both bitcoin and ether.
In another variation on the crypto theme, the Purpose Bitcoin Yield ETF and the Purpose Ether Yield ETF put an income spin on non-income-producing assets. These funds generate monthly distributions by writing covered calls on 10%–50% of the portfolio holdings.
What all the crypto ETFs had in common in 2022 was plunging net asset values. All but one lost more than 60% in their only full calendar year to date. Covered calls didn’t help. The Purpose Ether Yield ETF lost 67%.
Investors and advisors who read disclosure documents can’t say they weren’t warned. Prospectuses and the short-form ETF Facts apply the highest risk rating to crypto funds. Disclaimers state that the funds are speculative in nature and suitable only for investors who are able to absorb the loss of some or all of their investment.
As investment managers and securities analysts have noted, cryptocurrency is an asset class that has no fundamental value in terms of financial metrics. These pseudo-currencies earn no revenues, pay no interest or other income, and in their short history have displayed extreme volatility.
Nor did the purported diversification benefits and low correlation of cryptocurrencies with traditional asset classes pan out. When the equity and bond markets plunged in 2022, so did cryptocurrencies. Crypto performed differently only in that it did much worse.
But in the early days of the crypto craze, optimism reigned. Assets under management in Canadian-listed cryptocurrency ETFs soared after Purpose Investments launched its industry-first Purpose Bitcoin ETF in February 2021 and raked in $1 billion in its first month.
Other firms both big and small — including digital specialist 3iQ Corp., CI Global Asset Management, Evolve Funds Group Inc., Fidelity Investments Canada ULC, Horizons ETFs Management (Canada) Inc. and Ninepoint Partners LP, all based in Toronto, and Calgary-based Accelerate Financial Technologies Inc. — climbed aboard the crypto bandwagon by the end of 2021.
Fidelity Canada provided institutional credibility for cryptocurrencies by announcing in January 2022 that it would add a “small allocation” of bitcoin to its Fidelity All-in-One Growth ETF and Fidelity All-in-One Balanced ETF. (The allocations remain as of press time.)
Fidelity cited “diversification benefits with the potential to improve risk-adjusted returns going forward.” Instead, crypto cut into returns as the Fidelity Advantage Bitcoin ETF lost 61.8% in 2022.
As the number of crypto ETFs soared from zero to 34, assets under management peaked at $7.5 billion in November 2021, according to National Bank Financial Inc. A little over a year later, at the end of 2022, assets have plunged to $1.7 billion.
Overwhelmingly, the asset meltdown has been due to capital losses. No crypto ETFs have been terminated. And only $118 million of the 2022 collapse was due to outflows, National Bank Financial said in a year-end report: “This suggests that crypto-asset ETF users are sticking to their allocations, possibly hoping for the market to recoup these losses in the long term — or they are treating this latest drawdown as an effective writeoff.”
Purpose continues to be a keen promoter of cryptocurrency. In the “Bitcoin 101” section on its website, the company claims that bitcoin — whose supply is limited to 21 million digital coins — provides a “gold-like hedge against inflation.”
On the contrary, soaring inflation rates and plunging bitcoin and other cryptocurrencies moved in opposite directions last year. Canada’s inflation rate was 6.3%, while the Purpose Bitcoin ETF lost 65.3% in its currency-hedged series and 61.9% in the non-hedged units.
Despite the recent divergence from inflation, Kuriya said there are many parallels between bitcoin and gold. Both are immutable assets that can’t be counterfeited and both have scarcity value. “Gold inherently is just a metal. It has value… because we ascribe value to it,” he said. “Bitcoin is the same.”
Some investors maintain that while cryptoassets are highly volatile, the case for the underlying blockchain technology is still strong despite the price collapse.
But, as with other alternative assets, management fees and expenses tend to be much higher for crypto ETFs than for broad-market index products. The low-cost crypto providers — CI and Fidelity — charge management fees (not including expenses) of 0.4%, which is still much more than an investor would pay to track the S&P/TSX Composite index or the S&P 500.
Fees charged by most crypto ETF issuers are much higher, and in some instances more expensive than actively managed equity ETFs. The Purpose Bitcoin ETF, for example, charges a 1% management fee and has a reported management expense ratio of 1.45%.
Among the most expensive is Evolve’s Bitcoin ETF, with a currently reported MER of 1.82%.