Crypto-curious investors test a cautious industry

The Toronto-based advisor, who says he’s neither pro– nor anti-crypto, has included bitcoin funds as an option for his clients since the first crypto ETF products were rolled out in Canada in early 2021. (A closed-end fund from 3iQ was listed on the TSX in 2020).  

However, he says only a small percentage of his clients hold crypto assets, and it’s not part of the firm’s core portfolio. 

While he believes bitcoin is more likely to rise than collapse, “it’s purely speculative,” he said. “If they don’t understand that they can lose 50%, 75% even 100% very quickly, [they] shouldn’t be invested in it.” 

The rise of crypto

Bitcoin’s rise above US$100,000 and BlackRock’s entry into spot bitcoin ETFs last year gained the attention of investors worldwide. While the price of the volatile asset has bounced around, it’s also received a bump in coverage from U.S. President Donald Trump, who has promised crypto-friendly reforms, launched his own meme coin and signed an executive order in March to establish a U.S. bitcoin reserve.  

Canada was the first country in the world to approve bitcoin ETFs. There were 16 Canadian crypto ETFs with net assets of $8 billion, and 12 crypto mutual funds with $216 million in net assets as of the end of 2024, according to the Investment Funds Institute of Canada (IFIC). Crypto has made its way into broad-based products from respected asset managers like Fidelity Investments. And manufacturers continue to propose new ETFs, including what could be Canada’s first leveraged crypto ETF from Evolve Funds Group Ltd. 

Michael Zagari, an investment advisor and associate portfolio manager at Montreal-based Zagari Wealth Advisory Group, part of Wellington-Altus, says clients also come to him for advice on esoteric crypto assets like memecoins. 

“If the client initiates the conversation, they usually have a particular token or cryptocurrency that they wanted to discuss. And keep in mind, there’s like millions of them out there,” he says. “I‘ll just flat out say, ‘I’ve never heard of this thing before.’” 

Zagari, who began integrating crypto assets into his model portfolios as soon as the first bitcoin crypto ETF launched in Canada, says he uses these calls to educate clients. 

Most are attracted by the speculative aspect of crypto, “thinking that they can become rich overnight,” Zagari said. “You quickly realize that you’re bringing them down to reality, and … trying to focus on the underlying technology, the adoption rates and the use cases of this token.” 

“Once we get through that kind of layer, clients kind of back off and say, ’OK, yeah, I’m out of my league at this point. I should probably just stay away.’” 

Retail investors can purchase crypto ETFs and mutual funds on their own through a brokerage account, or buy cryptocurrencies directly through exchanges, only some of which are registered to do business in Canada. As more clients get interested in digital assets, the danger for advisors who can’t or won’t engage on the topic is that clients may go around them, potentially taking on more risk than they can handle, Zagari said.  

To approve or not approve

Most independent dealers don’t address crypto publicly, or state whether they offer clients access to crypto funds. 

However, CI Global Asset Management says there are 16 investment dealers that allow their advisors to sell CI Galaxy crypto funds. The firm has partnered with Galaxy Digital Capital Management to offer crypto ETFs. It also has a blockchain index fund.

Jennifer Sinopoli, executive vice-president and head of distribution at CI Global Asset Management, says firms have their own evaluation process when it comes to new products. 

“They all have their own due–diligence process, their own risk–rating process and their own resources [to] evaluate the suitability of that product being on their shelf and being made available to investors,” Sinopoli said. 

A Richardson Wealth spokesperson confirmed that it undertakes a full due–diligence review, after which most — but not all — new prospectus products are added to its shelf. 

“But with more complex funds and asset classes, we reserve the right to review and block them from sale if we are uncomfortable with the associated risks, even if the issuer has other funds on our platform,” the firm said in an emailed statement. “At this point, from a general risk perspective, the decision has been to only have exposure to ETFs in this asset class.” 

Edward Jones Canada, whose principal, Canadian products, Scott Sullivan confirmed it “does not recommend any crypto solutions.” But it’s not clear how many others have made the same decision. Several firms did not respond to Investment Executive’s inquiries about crypto funds on their product shelf. 

“A lot of organizations, including banks, just don’t see what the upside is, and offering it doesn’t really fit into their philosophy,” said Noah Billick, a partner with crypto and blockchain specialty law firm Renno & Co. in Montreal. His clients include digital asset manager 3iQ.  

“There are a lot of places where it just hasn’t been approved or it’s approved on an exception basis,” he said, noting that while clients can’t buy crypto funds through their bank advisor, investors can access it through self-directed investing accounts with the banks’ discount brokerages. 

In addition to regular know-your-client and know-your-product compliance requirements, some firms have a non–solicitation component that precludes advisors from discussing digital assets with clients unless the client initiates the discussion. 

According to an OSC staff notice in mid-2023, all existing crypto ETFs and mutual funds are classified as alternative mutual funds. The Canadian Securities Administrators has proposed to classify all new crypto funds in the same way — that proposal, released Jan. 18, is out for comment until April 17. 

Any CIRO-licensed advisor can invest clients in crypto ETFs — if their firm allows it, Sinopoli noted. MFDA-licensed advisors need to pass a proficiency requirement set by the dealer. 

Even if their firm allows it, many advisors and portfolio managers steer clear of crypto, said Billick. 

“Many discretionary portfolio managers will not touch crypto, don’t understand it, don’t believe in it,” said Billick, who’s also the firm’s director of regulatory, funds and compliance. “It’s still far from being widely adopted, but I think that it is growing. More and more advisors are starting to at least dabble in it.”

Like Microsoft in the 1990s

Compliance fears are holding back some firms and advisors from getting into the space, said Wellington-Altus Private Wealth’s chief market strategist, Jim Thorne. 

“This is exactly the same as the 1990s, when the [retail] investor bought Microsoft before the broker felt comfortable introducing it into their asset allocation program because of the view of new innovative products by their institution and the compliance department,” he said. 

In 2017, the Ontario Securities Commission published a staff notice that outlined the expectation for firms to register for a change of registration in order to sell crypto funds, Billick noted. 

But Billick said some firms offer it without being registered to do so. 

In a response to emailed questions, an OSC spokesperson said the change in registration “didn’t create any new obligations.” However, “firms who are selling crypto funds, but are not registered to do so, may potentially be in breach of Ontario securities law requirements and could face enforcement action.” 

“As a portfolio manager myself, I would not have necessarily thought that I needed to go to the regulator to get their permission to advise my clients to buy a small amount of a prospectus–qualified product if it was otherwise suitable to them,” said Billick, who was licensed as a portfolio manager from 2018 to early 2023. “To me, that’s a strange thing.” 

The investment case

Advocates argue that bitcoin’s value comes from its scarcity — there will only ever be 21 million coins — and from the immutable ledger blockchain technology that underpins it. 

But crypto assets defy traditional valuation methods, Billick said. 

“A lot of people have made the case for why certain kinds of cryptos do really have fundamentals, but what they don’t have is underlying assets or cash flow,” he said. “It doesn’t lend itself to the traditional ways that you would value an asset.”

Bitcoin and other crypto asset values are based on a blend of scarcity, adoption and market psychology rather than traditional metrics, Zagari said. He noted that utility of the technology is important — as is sentiment, which can drive values soaring or tumbling. 

“It’s important to mention that digital assets are not unique when it comes to sentiment, he said. “The beginning stages of adoption [of a new innovation] usually follows a speculative path,” depending on the impact of its utility. 

Whether or not advisors are sold on crypto assets, bitcoin is no longer just a fringe play. Witness Blackrock’s endorsement late last year of a 1–2% allocation to bitcoin for diversification and as a hedge against inflation. 

Wellington-Altus’s Thorne believes crypto can serve a similar role to gold in a portfolio. “Let’s be clear about this, as with commodities, if you put a proportion of 3% to 5% [bitcoin] in your portfolio, you increase the Sharpe Ratio of your portfolio, you increase the risk-adjusted return of the portfolio. There is a chapter in the CFA on this,” he said. 

An easier regulatory environment

There have been high-profile frauds associated with the cryptocurrency sector, including the collapse of crypto platform FTX in 2022 and the US$1.5–billion hack of crypto exchange Bybit on Feb. 21. In 2023 alone, Americans reported losing US$5.6 billion in crypto frauds, according to the FBI’s first Cryptocurrency Fraud Report, released in September. 

In the U.S., Trump has signalled that an easier regulatory and enforcement environment is on the way for crypto — which could increase risks to investors. 

But Canada’s gained a positive reputation for its relative regulatory certainty with U.S.-based custodians, Billick said. 

“I’m sure there will be more risks as a result of the expected deregulation in the United States,” Billick said. “Having said that, I can tell you that there’s been a very real maturing in the industry.” 

Even though Canada hasn’t created a legislative framework for crypto — something the U.S. may now leap ahead of us on — many of Billick’s U.S. clients are already operating here and view the regulatory environment as positive. “They’re interested in having regulation and regulatory certainty, and they’re interested in seeing how Canadian entities have figured this stuff out.”