A Canadian company has beaten the U.S. to the punch by getting regulatory approval to launch North America’s first exchange traded fund (ETF) designed to track the price of bitcoin.
The Purpose Bitcoin ETF can be held within registered accounts like an RRSP, TFSA, or RESP.
Som Seif, Purpose Investments' founder and CEO, thinks Canadian regulators felt it was an important product for the marketplace.
“Investors are already saying we're going to own this asset, one way or the other." he told Yahoo Finance Canada.
"I think regulators are probably recognizing that it's probably better to put that into a regulated structure than a non-regulated structure."
Directly holding bitcoin has its risks. Exchanges have been hacked, storage keys can be lost, and passwords can be forgotten. Seif says the ETF takes those risks out of the equation.
He also says the ETF structure means it will track the price of bitcoin better than other available vehicles like closed-end funds and exchange traded notes because of their premiums as high as 70 per cent.
“An official ETF structure provides for daily liquidity and daily mark to market and market makers and their sole job is to ensure that the price of the ETF and the price of the net asset value of the ETF are directly linked and trading throughout the day that way.” he said.
Besides not having a premium, what makes the Purpose ETF unique is that it directly holds bitcoin. Every dollar coming into the fund means it will have to purchase a dollar worth of bitcoin. Other investment vehicles track futures, which leads to a contango effect.
“If you just hold futures and roll the futures, you will have a risk of underperforming bitcoin over time because it prices into a futures price as opposed to a current price,” Seif said.
“So whenever you have the ability, this is no different than in gold or oil or anything like that. But if you can hold the asset directly, you always get the pure spot value of the asset."
Different kinds of risks
Bitcoin remains a volatile and risky asset, so Seif says it should represent less than 5 per cent of the average investors’ portfolio.
Earlier this week, the Bank of Canada’s deputy governor Timothy Lane warned cryptocurrencies are a “speculative mania” and a “flawed method of payment” as the price of bitcoin hit a record high.
He also said Canada’s central bank is working on its own digital currency. University of Calgary researchers are helping the bank. One of those researchers says the risks of buying the Purpose ETF versus buying bitcoin directly are different.
“On the one hand investing in this fund might be a bit safer if we believe that the custodian of the fund is better at safeguarding the bitcoin from hacker attacks than the individual investor,”
“On the other hand investing might be a bit riskier if the fund’s price does not closely follow the price of bitcoin, which we call basis risk.” University of Calgary associate professor Alfred Lehar told Yahoo Finance Canada.
Lehar says he thinks bitcoin is here to stay but doesn’t see it as an important channel for making payments in the near future.
“In the long term we should invest our money in assets that generate some value, like companies that innovate or produce goods that we need,” he said.
“Bitcoin has no intrinsic value but it is available in limited quantity, in that sense it similar to gold.”
The ETF will have a 1 per cent management fee and could launch as early as next week but there’s no set date at this point. The ticker symbol will be BTCC.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.