Why a bitcoin ETF isn’t the one vehicle to rule them all

CEO of pioneering Canadian digital asset management firm explains why ETFs might not be right for bitcoin long-haulers

Why a bitcoin ETF isn’t the one vehicle to rule them all

For the past several weeks, investment firms in Canada have been vying for the honour of launching the very first bitcoin ETF. The first-mover advantage eventually went to Purpose Investments with the Purpose Bitcoin ETF, BTCC, which saw $165 million worth of its shares trading on the first day and gathered more than $420 million in AUM by day two. Hot on Purpose’s heels was Evolve with its own bitcoin ETF, EBIT, which began trading a day after BTCC.

Three other firms have filed prospectuses with Canadian securities regulators to launch a bitcoin ETF. Among them is 3iQ, which established itself as a pioneering digital asset management firm when it launched the Bitcoin Fund, Canada’s first closed-end fund that provides exposure to the alternative asset class, in April last year.

“We worked long and hard with the OSC to make sure that the offering for Canadians was within the legal context of the Canada investment funds regulations,” Fred Pye, executive chairman and CEO of 3iQ, told Wealth Professional. “Once we arrived at the best way to do this for closed-end funds for Canadians, it opened the door for ETF providers to then use the same exemptions and regulations that we challenged on.”

After spending the majority of 2020 hovering around the US$10,000 mark, bitcoin started 2021 just shy of US$30,000 per unit; more recently, it broke past the key price level of US$50,000. As of yesterday, it had posted a one-year return exceeding 400%. With those kinds of gains and a return profile that’s uncorrelated with other asset classes, it’s small wonder that even institutional investors are looking at diversifying their portfolios with bitcoin exposure.

And with bitcoin ETFs now on the scene, Pye said that getting access to the cryptocurrency has become easier than ever for the average person. As opposed to opening their own wallets and establishing their own protocols for bitcoin and altcoins, they can now get regulated, efficient, and tax-advantaged exposure either through closed-end funds like 3iQ’s Bitcoin Fund or through a bitcoin ETF.

“Now, people who want to trade it and like to trade volatile assets can do so in their TFSA, which is extraordinary,” Pye said. “Based on the activity we’ve seen for the Purpose bitcoin ETF, a lot of people are looking for a vehicle to day-trade bitcoin, while the institutions and the real money are looking for an investment vehicle.”

For individual bitcoin long-haulers who expect its price to go up by five or ten times in the future, Pye said, getting exposure through a tax-advantaged account would provide valuable insulation for those who don’t want to give a cut of their gains back to the government. That means investing in bitcoin through an eligible vehicle like an ETF or a closed-end fund.

Many investors base their decisions on expenses, and would therefore see ETFs as the vehicle of choice because of their lower management fees. The Purpose Bitcoin ETF comes with a management fee of 1%, whereas 3iQ’s closed-end bitcoin fund has a management fee of 1.95%.

But according to Pye, the calculation shouldn’t end there. “The best possible rate of return on a bitcoin ETF is the price of bitcoin less the expenses,” he said. “For a closed-end fund, you also consider the price of bitcoin less the expenses, but then also add the accretive nature of at-the-market offerings and normal course issuer bid purchases.”

A closed-end fund that’s trading at a premium to its actual value, Pye explained – if it’s worth $50 per unit but trading at $45 per unit, for example – has the ability to buy up units and pass on the profits to current unitholders. On the other hand, if it’s trading at a premium, it can issue additional units and spread the profit among current unitholders as well. That means in either case, the positive returns of a closed-end bitcoin fund aren’t determined solely by the price gains of bitcoin.

“If you want to own bitcoin for the long run, you're better off in a closed-end fund. And if you want to day trade Bitcoin, then you're better off to trade an ETF,” he said. “A closed-end fund is accretive – you're being paid to own the fund. So as long as we can make it accretive that it pays off the management fees, it's the best way to own it long-term.”


Follow WP on FacebookLinkedIn and Twitter