Is the new 'Bitcoin Fund' a triumph for retail investor freedom?

The OSC approved proposal and it’s set to be traded on the TSX, but is the new crypto product worth buying into?

Is the new 'Bitcoin Fund' a triumph for retail investor freedom?

The Ontario Securities Commission (OSC) last week approved a proposal for an investment fund based on bitcoin. 3iQ, the crypto-fund manager who brought the proposal to the OSC, was invited to submit a prospectus to list their “Bitcoin Fund” on a major Canadian exchange. This marks the first opportunity for Canadian retail investors to buy into the value of Bitcoin within a regulated market. 

For Canadian crypto-advocates this is a triumph of investor freedom and a sign of crypto’s inevitable rise into ordinary retail portfolios. For critics, it exposes the risks and volatility of Bitcoin to retail investors, who don’t have the same resistance to risk that an accredited investor might. It’s now up to advisors to see what role this fund might play. 

“Canadians deserve a regulated product in which to invest,” said Fred Pye, CEO of 3iQ. “It came out loud and clear in the decision that absolutely Canadians should be able to invest in this asset class with the comfort of a regulated product.” 

Pye explained his Bitcoin Fund as a similar model to the old Central Fund of Canada. The Central Fund was tied to $8 billion in gold and buying into the fund represented 100% exposure to the value of gold. The Bitcoin Fund is tied to a pool of Bitcoin, and buying into it represents a 100% exposure to the value of that cryptocurrency. The bitcoin itself will be held in New York by Gemini Trust, a cryptocurrency exchange and trust company, while the Fund is likely to be traded on the TSX. 

Martin Lalonde, president of Rivemont Investments and a cryptocurrency advocate, applauded the OSC’s decision. He sees Bitcoin’s rise as inevitable, and agreed with Pye that balanced portfolios should have some exposure to crypto. 

“With this decision, any investment account will be able to own that product,” explained Lalonde. “Right now you can’t do that with Bitcoin, which is unregulated in Canada.” He also approved of the choice to use Gemini Trust, a company he sees as trustworthy and well-regarded by regulators. 

The OSCs ruling reversed a decision from February 15 of last year, which denied 3iQs proposal, citing the volatility of bitcoin. The new ruling asserts that it isn’t the OSC’s job to regulate volatility. 

“It is also outside the scope of the authority of securities regulators to immunize investors against risk or against loss,” the ruling stated. “And, it is not the job of securities regulators to ban speculation or risk-taking.” Pye described the ruling as categorical, the result of three years’ work by 3iQ. He claimed it addressed every institutional concern typically raised around custody and auditing for a Bitcoin product. 

Not everyone is happy with the decision. London, UK-based blockchain journalist, and long-time cryptocurrency critic, David Gerard thinks that retail investors shouldn’t be exposing themselves to the volatility of Bitcoin. 

“As far as I can tell, the Bitcoin market is very thin, it's very manipulated,” Gerard told WP. “You have things like $500 price jumps in 15 minutes. That's not organic trading activity.” He blames a bitcoin derivatives market for that volatility, though he admits he’s not found a “smoking gun” that points to outright manipulation. 

Gerard accepts the logic of the OSC’s decision that investors should be allowed to buy into cryptocurrencies on a regulated market. He did raise a concern that “mom and dad” investors don’t have the same capacity to deal with risk that accredited investors do.

Pye isn’t advocating for a total exposure to his Bitcoin Fund. He merely thinks that given the rise of the cryptocurrency and the steady growth of cryptocurrencies as a whole, Canadian retail investors should be allowed to take on some of this asset class. 

“There are two questions investment advisors should ask themselves: is money going digital? The answer is yes. And is money going digital non-government controlled? The answer is probably yes,” Pye explained.

“Therefore, your asset allocation or your exposure to this asset class should be greater than zero, that’s all. It doesn't have to be 5% 10%; it just has to be greater than zero because it's not 100% probability that it fails.”

Lalonde echoed Pye, telling WP that Bitcoin itself is unfairly maligned. Despite the rise of a number of other cryptos, Bitcoin has held on and Lalonde thinks it provides huge utility as a digital store of value. 

“My view is that getting exposure to this asset class is absolutely paramount for any investment advisor looking for a non-correlated asset, which is what we spend all our lives doing as investment advisors, and I've been an advisor for 35 years,” Pye said, when asked what advisors should take from this decision. 

The ruling opens the door for other passive cryptocurrency funds to be traded in Canada, but Lalonde says his team at Rivemont aren’t going to launch a similar product. Rivemont is an active manager, and Lalonde says the entry of actively managed crypto funds into a regulated market is still a long way off. 

Two days after the OSC’s decision was announced, the Investment Industry Regulatory Organization of Canada (IIROC) announced the members of its new “Crypto-Asset Working Group,” saying it’s “taking steps to deepen its understanding of crypto assets”.