PRODUCTS – It would be launched as early as next week, according to an analyst.
The world’s first exchange-traded fund (ETF) whose underlying assets will be « physical » Bitcoins will be launched shortly by Purpose Investments, reports a team of TD Securities analysts.
The Purpose Bitcoin ETF, which will carry a 1% management fee, will be the world’s first direct custody Bitcoin ETF. This ETF is intended to provide investors with exposure to the leading cryptomony, Bitcoin, by investing directly in physically settled Bitcoins.
On Friday morning, Purpose obtained approvals from the Canadian Securities Administrators.
This ETF will be offered in a currency-hedged Canadian dollar version (BTCC), a currency-unhedged Canadian dollar version (BTCC.B) and a currency-unhedged US dollar version (BTCC.U).
« Whether you think Bitcoin is worthless or $1 million, the listing of the world’s first Bitcoin ETF is a historic moment for the ETF industry and Canada, » writes TD Securities in a memo to its clients.
The ETF will be an alternative mutual fund that will hold long-term Bitcoin in physical form as opposed to Bitcoin futures. The fund intends to track the TradeBlock XBX index, which uses an algorithm across multiple Bitcoin trading platforms to calculate the consolidated price of Bitcoin every second.
The preliminary prospectus is full of warnings about the risks associated with Bitcoin. « Given the speculative nature of Bitcoin and the volatility of the Bitcoin markets, there is significant risk that the Fund may not be able to achieve its investment objectives. An investment in the fund is not intended to be a complete investment and is suitable only for investors who have the capacity to absorb a loss of some or all of their investments. An investment in the fund is considered high risk, » it states.
According to the document, the low correlation of Bitcoin’s returns to Canadian bonds, Canadian and foreign equities (0.01 to 0.09) can bring diversification to a portfolio. As of January 31, 2021, Bitcoin’s network represents a value of US$615 billion, according to the preliminary prospectus.
A race won by Canadians?
The arrival of what would be Bitcoin’s first ETF comes at the end of a long epic journey to provide a virtual currency-related product in the form of an ETF. Both Purpose Investments and Evolve Funds filed regulatory filings with the Ontario Securities Commission (OSC) in 2017 for ETFs based on Bitcoin futures contracts.
The OSC rejected them, says the TD Securities analyst team in its note: « At the time, regulators were not convinced that the market was appropriate for retail investors, making suitability a significant concern. »
However, other funds of other types that rely on cryptomoney were created the same year, including the Fonds Rivemont Crypto, launched on December 14, 2017, which is aimed at qualified Canadian investors.
In 2019, 3iQ successfully appealed the OSC’s decision to reject Bitcoin’s filing by the regulator. In its appeal, 3iQ argued that the OSC was not required to determine the suitability of Bitcoin to investors.
« Shortly thereafter, fund managers including 3iQ, CI and Ninepoint launched competing closed-end Bitcoin funds in Canada. While this approval paved the way for the launch of competing funds, the closed-end nature of the fund prevented the launch of an ETF, » the TD Securities memo states.
Subsequently, several companies (Arxnovum, Evolve, Horizons, Accelerate, Purpose Investments) attempted to launch Bitcoin ETFs, working closely with the OSC. Purpose would have won this race according to TD Securities and its ETF would be launched as early as next week on the Toronto Stock Exchange.
The timing of the ETF’s launch will be peculiar, as this week Tesla announced that it holds $1.5 billion in Bitcoin and a senior Bank of Canada official, Tim Lane, made headlines calling the prices of cryptographic currencies a « speculative mania », according to the TD note.
The broker expects these fund companies in turn to achieve their goal of creating a Bitcoin ETF.
It is difficult to predict the effect of the introduction of Bitcoin ETFs. « One area we will be watching closely over the next few weeks is the premiums to net asset value of the large closed-end funds that follow Bitcoin in North America. These premiums, which are trading around 10%, are expected to decline as a result of the listing of Bitcoin ETFs. Closed-end funds are expected to lose their scarcity premium and arbitrageurs will be able to buy the ETF and short sell the closed-end fund to merge the closed-end fund with its net asset value, » says the TD Securities note.