The case for and against investing in them
Crypto exchange-traded funds (ETFs) have opened up the world of digital coins to ordinary mom-and-pop investors who may not have the technical knowledge or desire to directly trade crypto exchanges, but want to add exposure to this sector to their investment portfolios.
However, that doesn’t mean these ETFs are the best fit for everyone.
“We don’t believe that speculation is part of a serious, long-term financial plan,” said Todd Neff, financial advisor, regional manager and principal at Edward Jones. Yahoo Finance Canada in a telephone interview.
Neff, who has been in financial advisory for about 20 years, says that the crypto market has not reached a level of maturity and stability that allows these assets to be properly valued, although he monitors developments in the crypto market.
“If we look at the other types of investments that we buy for clients, we can assign them some sort of value. And that’s the challenge with cryptocurrencies. There are no underlying fundamentals, like cash flow or profits, to support the valuation of the currency,” he said .
Crypto goes mainstream
Arguably, Bitcoin first began to wade into the mainstream investment landscape in late 2017 when it traded around US$20,000, a record high at the time, and caught the attention of retail investors, regulators and government authorities. It made an even bigger splash during the pandemic when it traded above USD 60,000 and really became known for its wildly volatile swings.
It was February 2021 when Purpose Investments’ Bitcoin ETF began trading on the Toronto Stock Exchange as a first for the industry.
Nawan Butt, a portfolio manager at Purpose Investments, had a hand in designing the firm’s crypto fund and works on the trading side of the business.
“What’s happening with the ETF revolution in the crypto space is it’s taking the, like, low-regulated online crypto space and putting it into a very highly regulated ETF structure and giving access to everyone from large institutions to investment advisors to do- that- self-clients to choose their investments as they want without being exposed to high barriers to entry,” he said in a phone interview.
The Investment Funds Institute of Canada says there were 19 crypto-related ETFs on offer in the country at the end of September, not including multiple series of the same fund.
Crypto ETFs can be held in registered retirement savings accounts and tax-free savings accounts, leading to potential tax benefits, while cryptocurrencies themselves are not eligible to be held in such registered accounts.
Butt also says that trading and holding money accounts on cryptocurrency exchange platforms requires a higher level of technical expertise and can carry an increased risk of cyber hacks, as opposed to buying a crypto ETF from an investment firm.
What you should consider before jumping in
For investors looking to add crypto exposure to their portfolios, they should follow the same advice they would when investing in any securities, says Jason Heath, a certified financial planner and CEO of Objective Financial Planners.
“Ideally, for any individual investment in your portfolio, it should be less than 5 percent. That’s a rough rule of thumb. Some people will say more, some people will say less. But I think that’s a good starting point.” he said.
He has had a small handful of clients inquire about crypto assets, but for the most part, many are hesitant or not overly knowledgeable about them.
Understanding risk tolerance is obviously important when buying securities, but for younger investors, Heath says they need to realize that their time horizon may not be as long as they think it is because of the various life milestones that can happen in a short amount of time.
“Many of the younger people investing in cryptocurrency arguably don’t have a long time horizon despite being young because they’re going to need money to pay for education, a car, a wedding, an apartment or something like that. So, you know, I think especially young people have to be careful about investing in more speculative investments,” he said.
Crypto ETF Alternatives
Bitcoin- and ethereum-related ETFs may be the most popular on the market, but there are alternatives for investors to consider.
Another way to play the crypto market without investing in digital coins yourself is by buying shares in blockchain companies, Heath suggests.
Meanwhile, Edward Jones’ Neff says smaller companies can provide exposure to speculative assets for investors interested in taking on more risk, even if they are not a direct alternative to cryptocurrencies.
“I’d stick with something that’s still kind of boring, but might add more volatility. I’d go to a mutual fund or an ETF that’s focused on small- or mid-cap stocks, or emerging markets. Or an individual stock that would be classified as in the middle class,” he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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