Bitcoin made headlines this week after U.S. regulatory changes made investing in the cryptocurrency more accessible – and experts say investors should be knowledgeable about the industry and understand the risks before diving in to cryptocurrency and related products.
On Wednesday, the U.S. Securities and Exchange Commission approved 11 exchange-traded funds (ETFs) that invest directly in bitcoin, with many opening trading platforms the next day.
Experts and stakeholders believe the change is transformational for the industry and represents a major step towards legitimizing cryptocurrency.
“It’s a big day for (the Grayscale Bitcoin Trust), its shareholders, and really the whole bitcoin and crypto communities overall,” Craig Salm, chief legal officer of Grayscale Investments, told BNN Bloomberg in a television interview on Friday.
With more people taking interest in bitcoin ETFs in light of the news, BNNBloomberg.ca spoke with Purpose Investments CIO Greg Taylor and Ninepoint Partners managing director Alex Tapscott to discuss what curious investors need to know about bitcoin ETFs.
WHAT IS A BITCOIN ETF?
An ETF is a way for investors to add exposure to an asset, such as gold or oil, without actually owning the product. These ETFs can be traded just like shares of a company.
“An ETF is an exchange-traded fund, which is like a mutual fund, but it trades with a stock, meaning you can buy and sell at any point in time of the day,” Tapscott said in the telephone interview.
“It's a category that's grown very quickly for many investors who prefer the convenience and liquidity of being able to invest directly through an ETF.”
The big difference between ETFs and the actual currency is that cryptocurrency requires a crypto wallet to exchange, while ETFs are available to anyone with a stock account and can be bought or sold at any time through the stock trading platforms.
“You have to open an account with a crypto broker or deal with a crypto exchange, and then once you actually purchase your real crypto asset, you have to find a way to store it,” Taylor said to explain the process of trading a cryptocurrency directly.
“These are all different things which a lot of people just weren’t comfortable doing and didn't really want to.”
WHAT OPTIONS ARE AVAILABLE IN CANADA?
Spot-bitcoin ETFs have been available in Canada since 2021 and as a result, there are several options for Canadians to invest in.
Tapscott said there are about 20 different Canadian ETFs on the market, each with varying fees and levels of attractiveness. He pointed to Purpose Investments, CI and 3iQ as among the biggest companies with bitcoin ETFs on offer in Canada.
Canadians can also access the new U.S.-based ETFs if their stock trading accounts have access to U.S.-based stocks.
Additionally, Canadians can buy ETFs in ethereum, the world’s second-largest cryptocurrency. Ethereum ETFs are not yet approved in the U.S., but they have been approved in Canada and some of these products are available.
Taylor’s firm, Purpose Investments, current offers both ethereum and bitcoin ETFs, which are backed by the cryptocurrencies.
HOW DOES THE U.S. REGULATORY CHANGE AFFECT CANADIAN INVESTORS?
Tapscott said the new U.S. regulations themselves don’t affect Canadian investors, but they could pressure Canadian platforms to lower their fees in order to compete.
“If you're an investor, then you have the option to buy something that's got better liquidity and lower fees, I think you're probably going to make the switch,” he said.
“It doesn't happen overnight. A lot of people are in these funds, they've got a taxable gain they’d rather not sell, but I think over time you're going to see money move away, or you're going to see the Canadian players forced to cut their fees to match what the U.S. providers are charging.”
Some Canadian players are already lowering fees to compete with their U.S. counterparts.
Fidelity Investments, which is among the 11 to receive U.S. approvals earlier this week, recently dropped the fees of its Fidelity Advantage Bitcoin ETF account in Canada to 0.39 per cent.
Because Bitcoin ETFs trade like stocks, anyone with access to the New York Stock Exchange can invest in the U.S.-based ETFs.
Taylor agreed that the U.S. market adds more competition in the space, but said he believes the Canadian products are best for Canadian investors.
“We still think that the Canadian products are best in class and are always going to be offering investors exactly what they’re designed to,” he said.
“We've had three years of trading basically at net asset value, so there's no premium or discount.”
WHAT SHOULD INVESTORS CONSIDER WITH BITCOIN ETFS?
Tapscott said investors need to understand that all crypto investments can be volatile, but that volatility can be a “double-edged sword.”
“Something can go up a lot or down a lot in any period of time, so there's the potential for gains but also for losses,” he said. “I think that people need to appreciate that before diving in.”
Tapscott added that he hopes people become educated in cryptocurrency before getting involved in the market, so they can make educated decisions about whether to invest.
WHAT ARE THE POTENTIAL RISKS?
Volatility remains the biggest risk when it comes to investing in cryptocurrency, and both experts agreed that investors should be comfortable with the volatile nature of the assets before investing.
“It's more volatile than other parts of the market so people need to be wary that this is not something you make into the core of your portfolio, it’s something that you can use as a complement to your portfolio and maybe offer some diversification,” Taylor said.
Tapscott also cautioned that investors should be wary of potential compromises or hacks of the companies providing these assets.
“That’s not something an investor can control, that's up to the issuer, like BlackRock or Fidelity, to manage in a prudent way,” he said, adding that while the possibility is remote, it’s something investors “may want to keep in mind.”