Bitcoin ETFs offer accessibility and safety but investors also need to weigh risks

From claims of its potential to protect against inflation to ushering in a new era of decentralization, cryptocurrency has been hailed by enthusiasts from all walks of life as the future of investing.

Though the promise of these benefits may be enough for some experts to encourage the development of easier avenues for investing in the crypto market, such as exchange-traded funds, a myriad of other factors — including digital currency’s recent association with Ponzi schemes and speculative investing — has left others unconvinced.

One professional in the former category is Nawan Butt, head of capital markets and a portfolio manager at Purpose Investments. The Toronto-based investment firm boasts the industry’s first bitcoin-based ETF, which Butt said aims to “bring the world of digital assets into a regulated space.”

“The biggest challenges within the world of digital assets are the complexity that comes with setting them up, and ensuring the security investors need (in order to) feel confident that those assets are safe at all times,” he said. 

“Questions related to setting up a secure (cryptocurrency) wallet involve a very high learning curve, which deters investors from easily gaining access to this space,” Butt continued, “but given how accessible ETFs are to the average investor, this makes it possible for people to even buy and sell bitcoin within their registered accounts,” including RRSPs or tax-free savings accounts.

Exchange-traded funds or ETFs are traded like stocks, but instead of being individual companies, the fund is made up of a group of assets — stocks from a specific sector, companies meeting a certain emissions cap threshold, currencies, or even an entire index.

By allowing investors to enter the world of cryptocurrency through ETFs, investors may be exposed to less risk because of the better diversification and regulatory environment.

“What this means is that first, these funds are based on a pool of different cryptocurrencies — so instead of buying one and relying on that one form of crypto to do well, you can buy an ETF, and if one cryptocurrency in that fund starts to go down, the others will help keep the fund as a whole afloat,” he said.

Purpose’s main strategy to keep clients’ crypto investments safe is by regulating them through “cold wallets,” meaning these assets are largely stored offline and cannot be accessed by anybody other than the individual in physical custody of the assets themselves — either through the form of a USB or other private keys that can’t be hacked over the internet. 

“On top of that,” added Butt, “to bring them online, we have multiple layers of security that need to be cleared from multiple parties and multiple different institutions.”

However, some experts — including Colin White, president and chief executive officer of Verecan Capital Management — warn these steps may not be enough to protect investors from the inherent instability cryptocurrency investments are known for.

Cryptocurrency “is not an asset class, and it’s not an investment. It’s pure speculation,” said White. 

“It has no intrinsic value. It is not profitable. … The only value bitcoin has is that somebody else is willing to pay more for it.”

Although this form of purchasing and selling cryptocurrency may be subject to greater regulation than previous forms of crypto investments — including the Ontario Securities Commission’s decision to review and approve Purpose’s bitcoin ETF in 2021 — in White’s opinion, this doesn’t resolve the myriad of other issues associated with digital currency.

For instance, though White noted the diversification inherent to an ETF might reduce the chance that one’s investment as a whole could fall victim to the numerous kinds of fraud-related scandals the cryptocurrency market has seen over the past few years, he argues the fact that the chance is still there — even if for just one form of digital currency in a given ETF’s basket — renders it a risky endeavour.

“In the end,” White said, “all this does is make it easier to invest in bitcoin — not necessarily safer.” 

Though Butt said he heeds the concerns of traditionalists who may not trust cryptocurrency as an investment option, he reiterated his faith in his company’s approach to crypto transactions and storage — and that one’s decision to engage with digital currency ultimately comes down to one’s beliefs in the direction investing is heading.

“The core idea people should think about is whether the long-term aspect of cryptocurrency as a digital currency that is decentralized, borderless, deflationary, and operating on a highly-secure network make sense to you, and do you think it makes sense to others in an increasing manner?” he said. 

“If yes, then a bitcoin ETF may be a way to meet that need more easily,” he said. 

“If not, there are a number of other investment options out there for you to achieve your goals — so long as you’re keeping an eye to the future of how the financial market is changing, you should be in a good place with your portfolio.”

This report by The Canadian Press was first published March 12, 2024.

Pascale Malenfant, The Canadian Press