Some would argue that cryptocurrency investing has become mainstream. Cryptocurrencies have grown so much in popularity that their total value has reached almost $2.5 trillion. That’s comparable to one of the biggest tech giants, Apple, valued at about $2.3 trillion by end of last month.* How can governments, financial institutions and regulators ignore the massive growth of crypto? They haven’t.
In June of this year, El Salvador made headlines with the announcement that the country will be using Bitcoin as a legal tender. Three months later, the Bitcoin Law took effect, making them the first nation to officially adopt the cryptocurrency.
Digital payments company Paypal, now allows their users in the U.S. to transact in various cryptocurrencies, including bitcoin, ethereum, bitcoin cash, and litecoin. Although some fintech companies such as payment giant Square, trading platform Robinhood, and crypto platform Coinbase have already integrated the use of cryptocurrencies, institutional adoption is still viewed to be in the early stages.
On Wednesday, October 20th, Bitcoin – the world’s largest cryptocurrency – reached all-time highs climbing 3.9% to $66,398.25 by 4 p.m. ET, according to Coin Metrics, topping a previous intraday record of $64,899 set in mid-April. The first U.S. bitcoin futures exchange-traded fund started trading on this day and to say that investors reacted positively to the launch was clearly an understatement.
Why Invest in Bitcoin?
Bitcoin, as previously mentioned, is currently the largest cryptocurrency by market cap. It was created in 2009 in response to central bank money printing during the Global Financial Crisis. Bitcoin is decentralized, meaning that unlike fiat currencies it is not issued or backed by any bank or government. The maximum amount of Bitcoin that can ever be mined is 21 million. Currently, about 18.7 million Bitcoin have been mined. The amount of new bitcoin per block drops by 50% every four years, meaning that the rate at which new bitcoin is issued continues to drop until the final bitcoin has been mined. The culmination of Bitcoin mining is expected to occur in 2140. As Bitcoin’s inflation rate drops every four years, the amount of new Bitcoin to be issued between now and then will be at a smaller and smaller rate. This predictability in Bitcoin’s inflation rate is one of the more attractive features of this asset, especially for those who remain skeptical and frustrated with the policies of global central banks.
Many people look at Bitcoin as a store of value, or a digital gold. Its limited supply makes it an asset even more finite than gold and could provide protection against inflation in fiat currencies as central banks around the world continue to print money.
Bitcoin is also used as a global payment system. Small transactions, like buying a cup of coffee, are made possible using the Bitcoin Lightning Network. This is known as a “layer 2” payment network that is as secure as the Bitcoin network but offers features like instantaneous and costless settlement.
El Salvador, for example, has adopted the Lightning Network for retail transactions. In September 2021, Twitter added a feature to tip in Bitcoin in partnership with Strike. Strike is a payment app that lets users send funds anywhere in the world through the Lightning Network. Over the Lightning Network, Bitcoin can be processed for free and transferred instantaneously around the globe. With this feature, the tip is converted from the user’s home currency to Bitcoin, then to the receiving user’s wallet and subsequently converted to their home currency. This technology is creating an exciting opportunity for Bitcoin and the Lightning Network as a global payment system.
Investing in Cryptocurrency: Bitcoin ETFs
One way for investors to access Bitcoin is through an ETF structure. There are many benefits of owning Bitcoin in an ETF, including its simplicity to trade, no digital wallet requirements, trades on regulated exchanges, can be held in a brokerage account and is TFSA & RRSP eligible.
Bitcoin ETFs are now available in both Canada and the US; however, there are important nuances in the structure of the different products. Canada was first to approve and launch physically backed (or spot) Bitcoin ETFs in February of 2021. The Bitcoin ETF, launched by Evolve, is one of the world’s first bitcoin ETFs, and trades on the TSX under the ticker EBIT. A physically backed Bitcoin ETF, like EBIT, means that it invests directly in physical Bitcoin. This is different than the recently approved US Bitcoin ETFs that are futures based, meaning these products buy Bitcoin Futures contracts listed on the CME Group.
Why Physical over Futures?
The main difference with futures-based Bitcoin ETFs is the roll cost. ETFs that track futures need to ‘roll’ (or buy and sell) new contracts when the old ones expire. The normal state of Bitcoin futures is contango, which means that the ETF must sell the expiring contract at a lower cost and purchase the next contract at a higher cost. This may create a significant cost for the investor. Bloomberg estimates these roll costs can incur costs to investors between 5-10% annually in returns.
While the SEC has only approved futures-based ETFs in the US so far, physically backed bitcoin ETFs which are available in Canada provide a superior experience tracking via direct ownership of actual bitcoin.
Crypto Investing with Evolve ETFs
Deciding which cryptocurrency to own and how much to allocate can be overwhelming for many investors. The Evolve Cryptocurrencies ETF (ETC) is Canada’s first multi-crypto ETF. ETC is designed to be a one ticket solution to cryptocurrency exposure. It is market cap weighted and rebalanced monthly. It currently holds Bitcoin (TSX: EBIT) and Ether (TSX: ETHR) but as regulators approve other crypto ETFs they may be added as well.
If you’re looking for crypto specific ETF investment options, Bitcoin ETF (TSX: EBIT) and Ether ETF (TSX: ETHR) offer a great way to access the price of Bitcoin and Ether respectively. For more information visit the fund pages here: https://evolveetfs.com/product/ebit/; https://evolveetfs.com/product/ethr/
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