This article appears in the February 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
The Canadian wealth management industry remains cautious about cryptocurrency as a suitable investment for clients, even as the category evolves at a lightning pace.
Last year, eight Canadian asset managers launched more than 30 crypto ETFs, attracting $6 billion in flows — representing 11.4% of the $52.5 billion in total flows for Canadian ETFs.
That performance is “astounding,” considering that “it’s really without the support of advisors, for the most part,” said Mark Noble, executive vice-president of ETF Strategy with Horizons ETFs Management (Canada) Inc., which offers a Bitcoin ETF and an inverse Bitcoin ETF. He said crypto ETFs are attracting money from the next generation of investors — Generation X, millennials and even Generation Z — primarily through the direct-brokerage channel.
In addition, institutional money managers see opportunities in blockchain technology as well as cryptocurrency. Last year, the Ontario Teachers’ Pension Plan Board provided funding for Bahamas-based crypto exchange FTX Trading Ltd., while the Caisse de dépôt et placement du Québec invested in the U.S.-based Celsius Network, a blockchain-based investment platform.
Increasingly, regulators are attempting to bring cryptocurrency under a regulatory umbrella. Last year, the Ontario Securities Commission launched a regime to register crypto exchanges, while the U.S. Securities and Exchange Commission gave its blessing to U.S. ETFs based on Bitcoin futures contracts.
“The interest in this space increased significantly once we got over that regulatory approval process,” said Scott Mackenzie, president of Fidelity Clearing Canada ULC, which became the first Canadian digital-asset trading and custody platform to be approved by the Investment Industry Regulatory Organization of Canada. “There’s no question that it gives the [institutional] client segment that we’re targeting an increased level of comfort in working with us.”
Clients with advisors are “very interested in hearing about crypto,” but are receiving little to no guidance about it, either as an emerging technology or as an investment, said Donna Bristow, chief product officer, wealth, with Broadridge Financial Solutions (Canada) Inc. in Toronto. She suggested firms that focus on “new innovations” may be providing educational support to their advisors, but across the industry, acceptance of cryptocurrency as an investment has been “slow going.”
“If the firm is not ready to embrace [crypto] yet, then it becomes a larger challenge for advisors [to counsel clients],” Bristow said.
Investment Executive asked 14 major Canadian investment brokerages in January whether they permit clients to have cryptocurrency holdings in any form. Eight firms said they do, one does not and five didn’t respond by press time or declined to respond. No firm indicated that it facilitates direct ownership of cryptocurrency.
For example, Wellington-Altus Private Wealth Inc. provides clients with access to ETFs and closed-end funds “whose only asset is its ownership of cryptocurrency, assuming the holding is appropriate for a client’s overall risk-tolerance profile,” according to a statement from the firm.
Richardson Wealth Ltd.’s clients who want exposure to cryptocurrency “can talk to their investment advisor about the suitability of available investments, either directly into ETFs that hold cryptocurrencies or into companies that are active in the space,” a spokesperson said.
A representative from Edward Jones, however, said the firm doesn’t permit its clients to hold cryptocurrency in any form, suggesting the investment is “highly speculative.”
Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc., said Canadian wealth-management firms that avoid discussing cryptocurrency opportunities with clients are doing them a disservice. “[Firms are] putting their brands first,” he said.
Zagari remains “very bullish on the technology, although I’m being very prudent with investors’ assets. The more you learn about [cryptocurrency and blockchain], the more you realize the potential.”
Zagari draws an analogy between the cryptocurrency market today and the dot-com boom of the late 1990s and early 2000s. The bursting of the internet bubble led to consolidation and, eventually, to the emergence of today’s tech giants. “I think that’s what’s going to happen with the [cryptocurrency] protocols you have today,” he said.
In May 2021, Zagari said he recommended a 1%–5% position in cryptocurrency as a long-term holding for clients whose portfolios are already on track to meet financial goals. As of February, “my [recommended] allocation is now closer to 5%,” he said. “If the investor has zero liquidity needs, high risk tolerance and can spread that risk over a long time horizon, adding Bitcoin to their investment may be appropriate. I have removed the condition of having to be on track to reach their financial goals as a filter.”
Meanwhile, asset-allocation ETFs from Fidelity Investments Canada ULC now include 1%–3% exposure to Bitcoin.
But Valerie Wowryk, portfolio manager and investment advisor with Richardson Wealth in Winnipeg, said she doesn’t include cryptocurrency in client portfolios because the wild price swings associated with cryptocurrency make it unsuitable for her clients.
Indeed, over the past 12 months, Bitcoin has traded between a low of US$28,900 and a high of US$68,800. On Feb. 9, Bitcoin closed at US$44,316, about 36% off its peak in November.
“There’s no enterprise value or intrinsic value” to Bitcoin that can be calculated, which means price is determined solely by what an investor is willing to pay, Wowryk said. “That’s why it’s difficult to consider it as an investment.”
Wowryk suggested the raft of new cryptocurrency ETFs in the market represents asset managers’ response to client demand rather than a signal that cryptocurrency is an appropriate holding: “It doesn’t mean it’s a good time to get in. It doesn’t mean it’s a good investment.”
Nevertheless, Wowryk said, the blockchain technology that enables cryptocurrency is “transformational” and likely a “game changer” over the longer term, which is why she does consider established technology firms that are investing in cryptocurrency or blockchain technology for client portfolios.
“Look for opportunities that are solid and are going to have some utility, where you’re going to have an economic benefit,” Wowryk said. “That’s how you invest [in cryptocurrency] and take yourself out of this crazy rodeo that’s going on.”