As fund portfolio managers hope to make cryptocurrencies (a.k.a. cryptocoins or tokens) more available to investors, the emerging asset class’s volatility continues to attract attention from regulators.
A news release from the Canadian Securities Administrators (CSA) in December 2017 cautions investment dealers and investors about the “inherent risks associated with products linked to cryptocurrencies, including futures contracts.” As well, the Washington, D.C.-based North American Securities Administrators Association issued a similar warning in January in which Joseph Borg, the association’s president, stated that “investing in cryptocurrencies is not for the faint of heart.” Borg added that investors “should go beyond the headlines and hype” to understand cryptocurrencies.
Financial advisors should do the same, says Dan Hallett, vice president and principal with HighView Financial Group in Oakville, Ont., and take the time to research and monitor this new asset class.
“[Advisors] need to have a thoughtful response for clients and an informed opinion on these things,” Hallett says.
In the meantime, several Canadian companies, including hedge fund firms and large asset-management firms, are working with regulators to find ways to give advisors and their clients access to cryptocurrencies, such as bitcoin, and the potential growth they represent.
“We think this is a space where we need to be and where investors need to be because there will be lots of opportunity,” says Martin Lalonde, president of Montreal-based Rivemont Investments Inc.
Rivemont recently received regulatory approval for its Rivemont Crypto Fund. In addition, as Investment Executive went to press, Toronto-based 3iQ Corp. was seeking regulatory approval for its Global Cryptoasset Fund for accredited investors.
On the ETF side, Steve Hawkins, president and co-CEO of Horizons ETFs Management (Canada) Inc. in Toronto, says that company is “aggressively considering the space for creating investment vehicles for an end-client.”
As well, Evolve Funds Group Inc. and Purpose Investments Inc., both based in Toronto, have filed preliminary prospectuses for bitcoin-based ETFs.
Some of these firms, such as Rivemont and Evolve, are looking to invest in bitcoin futures contracts, which became available on the Chicago Board Options Exchange and the Chicago Mercantile Exchange in December.
Some fund portfolio managers are looking to invest directly in cryptocurrencies. For example, 3iQ Global Cryptoasset Fund aims to invest directly in three cryptocurrencies: bitcoin, ether and litecoin. The fund will not invest in futures contracts.
To put the concept of cryptocurrencies into perspective, Frederick Pye, 3iQ’s president and CEO, regards bitcoin and other cryptocurrencies as digital commodities – a category that also includes cloud storage and bandwidth.
Cryptocurrencies also are comparable to more familiar commodities, such as gold, silver and copper, Pye adds. Bitcoin advocates often argue that the cryptocurrency is akin to gold for its high value. Pye equates litecoin, on the other hand, to silver because its faster blockchain may make it a better a method of payment.
Ethereum, unlike bitcoin’s blockchain, allows third parties to create and maintain their own coins. Its coin, ether, is linked to the growth potential of blockchain technology, Pye says, just as the price of copper often is connected to economic expansion.
Of the more than 1,000 cryptocurrencies out there, bitcoin continues to garner the most attention, in large part because of the way its price has skyrocketed over the past year (albeit with a few bumps a long the way). After starting 2017 at around US$1,000, bitcoin reached a high of US$19,343 on Dec. 16. That high was short-lived, however; the price dropped to US$12,629 on Dec. 30. As Investment Executive went to press, bitcoin was priced at around US$13,700.
Despite such volatility, bitcoin’s advocates argue that there are reasons to be bullish. One argument in the cryptocurrency’s favour is that a finite number of bitcoins (21 million) can be created. Other supporters argue that most of the world’s population has yet to buy into the global currency, meaning there is still plenty of money that could flow into the market.
Investors should take the long view on cryptocurrency investments, Pye says: “People have to keep their eye on the long-term potential of bitcoin as a global store of wealth.”
Hallett, on the other hand, questions the viability of bitcoin, or any cryptocurrency, as an investment: “It really is speculation. There’s no fundamental reason I can see to explain the huge runup in price or even just the overall volatility.”
Similarly, Andreas Park, associate professor of finance with the University of Toronto’s Rotman School of Business, views such investments as highly speculative because, unlike traditional assets such as gold, bitcoin has no underpinning value other than investor demand.
“Think about classic cars; think about Beanie Babies,” Park says. “[There’s] really more a belief that there is an intrinsic value to [cryptocurrency investment]. In other words, people want it.”