Canadian asset managers are racing to launch the country’s first cryptocurrency exchange-traded fund that tracks the price performance of bitcoin.
Horizons ETFs Management (Canada) Inc. is the latest investment company to file a preliminary prospectus with the Ontario Securities Commission to launch a bitcoin ETF – a fund that would trade on the Toronto Stock Exchange under the symbol HBIT and track the price of bitcoin.
Industry analysts say the launch of a bitcoin ETF for retail investors would provide widespread adoption and allow investors to more easily access an asset class that has proven difficult for them to purchase through digital wallets. As well, an ETF would bring significant savings to retail investors as closed-ended funds, an investment which typically trades with large premiums, in some cases as much as 40 per cent.
This is the second regulatory filing this month for a bitcoin ETF. In early January, ETF newcomer Arxnovum Investments Inc. applied with regulators to list a bitcoin ETF that would also trade on the Toronto Stock Exchange.
The OSC has not approved either fund.
Bitcoin is a digital currency that is not backed by any country’s central bank. First launched in 2009, the cryptocurrency spiked in popularity in 2017 after reaching US$20,000 before plummeting more than 85 per cent in 2018.
In recent months, investor interest in bitcoin has once again surged as the price hit a new all-time high of US$40,000 at the start of 2021. But the digital currency is also known to be highly volatile, with price swings of more than 30 per cent in one day.
Horizons ETFs highlights in its regulatory documents that the bitcoin funds are not “conventional investments” and are “highly speculative investment tools.” The ETF provider is known for its leveraged and inverse ETFs, which use complex contracts to magnify returns and are far riskier than traditional ETFs. In addition to HBIT, the company has filed to launch an inverse version of the bitcoin fund – under the ticker HIBT – in which investors can bet on the price of bitcoin dropping.
Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc., says retail clients should exercise “great prudence” around highly volatile and speculative assets like cryptocurrencies.
“Before buying any bitcoin, it would be prudent to have the technical sophistication required to understand the peer-to-peer mathematical cryptography that undergirds the [cryptocurrency] system,” Mr. Straus said. “Clients this sophisticated are likely to be savvy enough to open their own ‘bitcoin wallet’ and trade directly on a crypto-asset exchange, obviating the need for an ETF.”
During bitcoin’s craze in 2017 and early 2018, both Canadian and U.S. ETF companies went head-to-head trying to launch North America’s first bitcoin ETF. At the time, several Canadian asset managers – including Horizons, Evolve Funds Group Inc. and Purpose Investments – submitted filings to regulators in the hope of launching bitcoin ETFs, but none of the companies received regulatory approval from the OSC.
Unlike some of the earlier investment proposals to the OSC, Horizons has filed to track the futures market of bitcoin – a market regulators may be more likely to approve. Futures are a type of derivative that allow investors to speculate on what a price will be at a later date. If approved, the ETFs will track an underlying index based on CME bitcoin futures contracts, which is being licensed from the Chicago Mercantile Exchange Inc.
The regulatory hurdles that stalled bitcoin ETFs in the past prompted other Canadian asset managers to pivot to entering the bitcoin market with closed-ended funds, which trade more like an initial public offering (IPO). Investment manager 3iQ Corp. paved the way for bitcoin closed-ended funds after winning a three-year battle with the OSC for approval to launch The Bitcoin Fund (QBTC:TSX). Last month, Toronto-based CI Financial Corp. completed a US$72-million IPO for its CI Galaxy Bitcoin Fund, while alternative-investment company Ninepoint Partners LP, also of Toronto, filed a prospectus to launch a similar investment called Bitcoin Trust.
“One of the key benefits of the ETF structure as a potential vehicle for crypto exposure is to largely get rid of the premiums/discounts to [net asset value] exhibited by closed-end funds in the secondary market,” said Andres Rincon, director and head of ETF sales and strategy at TD Asset Management, in a research note last week.
“It makes [us] cringe to see retail investors pay for an asset at a substantial premium to [net asset value] on public exchanges ... the outcome is allowing retail investors to consistently overpay for a security in secondary markets based on no mathematical reasoning.”
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Clare O’Hara