Crypto exchange-traded funds (ETFs) have opened up the world of digital coins to regular mom-and-pop investors who may not have the technical knowledge or desire to trade directly on crypto exchanges, but want to add exposure to this sector. to their investment portfolios.
However, this does not mean that these ETFs are best suited for everyone.
“We don’t believe that speculation is part of a serious, long-term financial plan,” said Todd Neff, financial advisor, regional leader and principal at Edward Jones. Yahoo Finance Canada in a telephone interview.
Neff, who has been in the financial advisory field for about 20 years, says the crypto market has not reached a level of maturity and stability that allows those assets to be properly valued, although he does monitor developments in the crypto market.
“If we look at the other types of investments that we buy for clients, we can assign some kind of value to them. And that’s the challenge with cryptocurrencies. There are no underlying fundamentals, like cash flow or profits to determine the valuation of the currency,” he said.
Crypto is going mainstream
Bitcoin probably only started entering the mainstream investment landscape in late 2017 when it traded around US$20,000, a record high at the time, attracting the attention of retail investors, regulators and government authorities. It made an even bigger splash during the pandemic when it traded above US$60,000 and became really famous for its very volatile swings.
It was February 2021 when Purpose Investments’ Bitcoin ETF began trading on the Toronto Stock Exchange as a first for the industry.
Nawan Butt, a portfolio manager at Purpose Investments, had a hand in designing the firm’s crypto funds and works on the trading side of the business.
“What’s happening with the ETF revolution in the crypto space is it’s taking that kind of low-regulated online crypto space and putting it into a very highly regulated ETF structure and giving access to everyone from large institutions to investment advisors to do-it-yourself clients to choose their investments as they wish without being subjected to high entry barriers,” he said in a phone interview.
The Investment Funds Institute of Canada says there were 19 crypto-related ETFs offered in the country as of the end of September, not including multiple series of the same fund.
Crypto ETFs can be held in registered retirement savings accounts and tax-free savings accounts, resulting in potential tax benefits, while cryptocurrencies themselves are not eligible to be held in such registered accounts.
Butt also says that trading and holding monetary accounts on cryptocurrency exchange platforms requires a higher level of technical expertise and can carry increased cyberhack risks, unlike buying a crypto ETF from an investment firm.
What to consider before jumping in
For investors looking to add crypto exposure to their portfolios, they should follow the same advice as investing in any security, says Jason Heath, a certified financial planner and managing director at Objective Financial Planners.
“Ideally, for any individual investment in your portfolio, it should be less than 5 percent. That’s a rough rule of thumb. Some people will say more, some people will say less. But I think it’s a good starting point.” he said.
He has had a small handful of clients inquiring about crypto-assets, but for the most part, many are hesitant or not too knowledgeable about them.
Understanding risk tolerance is obviously important when buying securities, but for younger investors, Heath says they need to realize that their time horizon may not be as long as they think it is due to the various life milestones that occur in a short period of time. time can take place.
“A lot of the younger people investing in cryptocurrency probably don’t have a long time horizon, even though they’re young, because they’re going to need money to pay for education, a car, a wedding, an apartment or something like that. pay. , you know, I think especially young people should be careful about investing in more speculative investments,” he said.
Crypto ETF alternatives
Bitcoin and ethereum-related ETFs may be the most popular on the market, but there are alternatives investors can consider.
Another way to play the crypto market without investing in digital coins yourself is by buying shares of blockchain companies, Heath suggests.
Meanwhile, Edward Jones’ Neff says smaller-cap companies can offer exposure to speculative assets for investors interested in taking on more risk, even if it’s not a direct alternative to cryptocurrencies.
“I’ll stick with something that’s kind of boring, but can offer more volatility. I’ll go to a mutual fund or an ETF that’s focused on small- or mid-cap stocks, or emerging markets. Or an individual stock that would be classified as in the mid-cap space,” he said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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