Why spot crypto ETFs are a winning solution for advisors

Purpose Investments COO explains how ETFs with direct ownership of crypto assets have a portfolio management edge

Why spot crypto ETFs are a winning solution for advisors

It’s been roughly fourteen months since Purpose Investments made history by launching the world’s first-ever spot bitcoin ETF, and the fund continues to be a widely sought-after solution for investors seeking crypto exposure. The strategy has also made waves among advisors across the planet – and it’s no wonder.

“We've received a huge overwhelming positive response so far, I think. That was not really a surprise, but at the same time, it was a great to see sort of that type of response from advisors broadly across the country,” says Vlad Tasevski, COO and Head of Product at Purpose Investments. “We've gotten so many inbounds even from outside of Canada.”

According to Tasevski, that interest has been driven by the broad excitement in the crypto and blockchain space, particularly given recent developments and the potential for the ecosystem to become “the most disruptive technology to emerge in our lifetimes.” Related to that, advisors are seeing increased demand from clients actively asking for an allocation to crypto in their portfolios.

With the launch of the Purpose Bitcoin ETF – and shortly thereafter, the Purpose Ether ETF – he says advisors a found a solution for several key challenges that crypto presents. For one thing, even if an advisor fulfilled the regulatory and registration requirements to directly hold crypto, the need to set up separate accounts and crypto wallets as well as perform extra due diligence represents a considerable technical barrier.

“The ability to do a one-click purchase of the Bitcoin Spot ETF is what really sold it to advisors here in Canada, and the feedback’s been similar from advisors across the world,” he says. “We’ve seen the highest proportion of interest coming in from the U.S., and we’re receiving inquiries from Europe and Asia as well.”

Purpose’s spot crypto ETFs are also appealing from a safety and security standpoint. The crypto assets held in the ETFs are held by world-leading institutional quality custodians, who Tasevski says have to meet the most demanding regulatory standards with respect to audits and safety from a custody perspective. Some high-profile scandals involving cryptocurrency and digital assets have taught harsh lessons to both investors and regulators, but it’s fair to say the crypto world has some way to go before it progresses into the institutional-quality level it needs to be at as an industry.

Because of regulatory frameworks governing financial advisors across the world, a mutual fund or ETF wrapper is the only option for the large majority to recommend or get crypto exposure for their clients. For Canadian advisors, having crypto in an ETF structure also confers a tax benefit as they can be held in registered accounts like RRSPs and TFSAs.

“In some other jurisdictions, we’ve seen the rise of either swap-based crypto ETFs or futures-based ETFs,” Tasevski says. “While there are some benefits to those, they’re still very inferior to spot crypto ETFs.”

The most immediate and considerable risk, particularly with futures-based ETFs, is the imperfect correlation with the cryptocurrencies they are based on. Since the introduction of bitcoin and Ethereum contracts on the Chicago Mercantile Exchange, Tasevski says there have been periods of contango as well as backwardation, which means investors and advisors hoping they could track those major cryptocurrencies’ performance are out of luck.

In a recent study conducted by Nasdaq, a 72% majority of advisors in the U.S. polled said they’d be more willing to put client assets in crypto if there were a spot ETF product available in the country. That could be driven by the tracking error they expect from futures-based ETFs; recent surveys and analysis have found that since the first bitcoin futures ETF was launched, it’s tracking error has been as high as 6% per annum.

“That exposure might change going both ways, and ultimately does not really provide any certainty to clients buying those ETFs,” Tasevski says. “The only way in fact for many advisors to get their clients real one-to-one exposure to crypto, on a second-by-second basis, is through direct spot ETFs.”