A Toronto-based money manager that launched the world’s first bitcoin exchange-traded fund (ETF) earlier this year is unveiling three new funds on the TSX Tuesday that will be the first crypto assets trading on stock markets that will pay out a monthly yield.
The new funds from Purpose Investments target investors looking to put their money into the volatile world of cryptocurrencies, such as bitcoin or ethereum, through more traditional investment vehicles.
An exchange-traded fund is similar to a mutual fund in that it is a collection of assets bundled together. Unlike a mutual fund, however, an ETF trades on a stock exchange, which makes it easier for regular people to buy, sell and trade them.
Last spring, Purpose launched what was then the world’s first ETF trading on a major stock exchange that gave investors direct exposure to bitcoin. Many others have launched since then, in lockstep with growing interest in cryptocurrencies.
At last count, Purpose’s most-heavily traded bitcoin fund had more than 24,000 bitcoins in it. At current prices for bitcoin, that stash is worth billions.
“Our bitcoin and ether ETFs [are] now $2.5 billion in assets,” Purpose CEO Som Seif said in an interview with CBC News.
The advent of ETFs that trade on major stock exchanges made it possible for people to buy crypto assets in the same way they buy stocks or bonds: through the banks and brokers they use to manage their RRSPs or TFSAs rather than through digital wallets and bitcoin dealers.
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Not everyone is a fan of bitcoin
Seif is a big believer in the future of cryptocurrencies, but that is far from a universal view.
Bitcoin mining, which relies on powerful computers continually running programs that solve mathematical problems, has been singled out for its massive environmental footprint, for example, with some estimating that the sector consumes more energy every day than some countries.
While backers laud cryptocurrencies for their security, that trait is also what makes them a convenient way for criminals to move and launder money.
Bitcoin enthusiasts like to compare it with digital gold, but that claim, too, doesn’t quite hold up to scrutiny. That’s part of why many countries and central banks have tried to crack down on it, with China going as far as declaring it “illegal” last month.
Despite those red flags, investors continue to pour money into the space, which is why Purpose is trying to cater to them by embracing the volatility while also attempting to offset it.
One fund, the Purpose Bitcoin Yield ETF, will invest in bitcoin. A second, the Purpose Ether Yield ETF, will hold another widely used cryptocurrency known as ethereum.
Both will employ what’s known as a covered-call strategy to generate income from the fund’s holdings, income that will be distributed on a monthly basis to those who hold units of the fund.
It’s a strategy that’s already been used with other assets, such as oil and gold, but never with cryptocurrencies.
By design, the funds ratchet down some of the potential upside of investing directly in a volatile cryptocurrency that can reach impressive peaks but offset that by giving investors a small trickle of income even when the price is dropping.
Purpose promises healthy yields
Unlike a dividend on a stock, which generally pays out a predictable and steady amount on a regular basis, the money the funds will pay out monthly will vary.
“We anticipate this to pay a pretty high yield, north of eight per cent, for sure,” Seif said. “But we think it will pay double-digit yield over time.”
That’s far from a guarantee, as ultimately, the value of the funds’ units will be pegged to the price of bitcoin or ethereum.
But if those yields can be achieved, they compare favourably to the income that can be produced from dividend-paying stocks.
The yield on the 60 biggest dividend-paying companies on the TSX right now, for example, is about 2.5 per cent. But those stocks are also far less likely to have days when they plummet 10 per cent or more — something that can and does happen to cryptocurrencies fairly frequently.
While bitcoin recently hit an all time high above $66,000 US and has more than doubled in value this year, it has not moved in a straight line, swinging wildly up and down.
Seif says the new funds cater to investors who don’t want to ride out those peaks and valleys by taking advantage of that volatility and buying financial derivatives that can profit from it.
“In today’s volatile environment … you can still participate in some upside but still generate a very attractive yield,” Seif said.
3rd fund expands beyond straight cryptocurrencies
A third fund, the Purpose Crypto Opportunities ETF, is not designed to pay out any monthly income but gives investors the opportunity to broaden their exposure beyond cryptocurrencies and into other parts of the crypto ecosystem, including chip makers such as NVidia, trading platforms such as Coinbase and Robin Hood, or even companies with large quantities of cryptocurrencies on their books, such as Tesla.
“It gives people a unique return stream from crypto that they otherwise don’t get from just buying the bitcoin or ether straight,” Seif said.
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The first two funds will have a management expense ratio, or MER, of 1.1 per cent, meaning 1.1 per cent of the money invested into the fund will go to the fund manager every year, regardless of the fund’s performance.
Because it will be more actively managed, the third fund will have a slightly higher MER of 1.25 per cent.
Expect the unexpected
Seif is bullish on the cryptocurrency space for the long term, but the short term history shows just how up and down it can be. This time last year, a single bitcoin was worth about $20,000 US. By April 2021, it was worth more than $60,000, before Tesla CEO Elon Musk took a lot of the wind out of the sector’s sails by announcing his company would no longer accept it as payment.
It sank to as low as $30,000 in July, before beginning its march up again, peaking at just over $67,000 earlier this month. On Monday, it was trading at about $58,000 as it was swept up in the wave of panic selling that hit stocks and oil prices on Friday in part because of fears over the omicron variant of COVID-19
Currency analyst Edward Moya with foreign exchange firm Oanda said that against that backdrop, bitcoin “will likely struggle to completely get its groove back until vaccine efficacy results in the coming weeks confirm highly vaccinated countries aren’t going back to lockdown mode.”
Bloomberg Intelligence analyst Mike McGlone agrees that bitcoin may have some room to fall in the short term at least.
“I see initial bitcoin support around $50,000 and don’t see it getting much below $40,000 on some kind of more macro swoon,” he said in an email.
Longer term, however, McGlone is a big believer in cryptocurrency, and he thinks the price of bitcoin could well hit $100,000 at some point next year.
A big reason for his optimism is that as cryptocurrencies become more mainstream and investors have more ways to buy them, that will breed confidence and create demand. “Bitcoin technicals and fundamentals remain favourable on … increasing adoption and demand,” he said. “ETFs are part of that.”