We are often asked to share our thoughts on Bitcoin, so this article is an attempt to do so. While this is based on some level of subject matter expertise, it is NOT an investment recommendation. Why not a recommendation, you ask?
The answer is part legal/regulatory and part investment-related. The regulatory environment regarding providing advice on Bitcoin is messy and fraught with risk for those providing it. So, for that reason, we will not offer investment advice on the subject. But we can, and will, share how we think about it, and help you to better understand the issues surrounding the various ways of getting exposure to it.
From the investment perspective, Bitcoin is at the high-risk or even speculative end of the spectrum. Nobody, including us, can tell you how this will work out. The arguments for why Bitcoin will thrive are as compelling as the ones that predict its doom. In the end, if you do decide to allocate to Bitcoin, it should only be based on your own convictions and not the beliefs of others. Thanks for nothing you say (fair), but how can you sort the signal from the noise on this subject to arrive at a rational point of view?
You won’t love this answer either, but we can offer some general directions. To truly understand Bitcoin and why it is NOT synonymous with cryptocurrency (shitcoins), you should expect to have to invest at least 100 hours of research to understand the distinction between permissioned and permissionless blockchain technologies and why that difference matters. It is beyond the scope of this paper to delve into that but, suffice it to say that Bitcoin is unique in that it is the only blockchain technology that is permissionless, consensus-based, and, therefore, an incorruptible ledger. Furthermore, Bitcoin is the byproduct of the perpetuation of this blockchain ledger. On your journey, you will assuredly encounter the argument that Bitcoin has no intrinsic value. The Ponzi scheme argument is the go-to con case. When you do hear this, ponder the following questions.
– What intrinsic value does any fiat currency like the Canadian dollar really have, and why isn’t it a Ponzi scheme, too? Fair warning: if you go down the “what is money” rabbit hole, add 1,000 hours to your research journey.
– What is the intrinsic value of an incorruptible, censorship-resistant ledger that could serve as the global custodian or book of record of everything? (add many more hours and possibly hallucinogenic therapy cost)
Good news: We will share a mental shortcut with you here that we believe is reasonable.
- It’s a bad idea to invest a lot of money into something you really don’t understand. So, if you can’t or don’t want to spare >100 hours, then you already have a part of the answer. Don’t invest at all or only an amount you are prepared to lose entirely.
- If you are still with us, take the perspective that the amount you invest is an expense like an insurance premium against the risk that fiat currencies like the Canadian dollar continue down their path of debasement. Like any insurance policy the trick is in getting paid. It is possible that Bitcoin could act as a hedge against this risk, but it’s equally possible that the insurance doesn’t pay out.
In the interest of full disclosure and not to influence or recommend in any way, we have put in more than the requisite time to understand both the underlying technology and the risks & opportunities represented by the Bitcoin asset class and conclude the following.
– While we assess the probability of continued currency debasement as high, we accept the risk that Bitcoin may ultimately prove NOT to be an effective hedge against debasement risk and, therefore, a lousy insurance expense.
– If on the other hand, the adoption of Bitcoin as a digital store of value and alternative to fiat currency continues, the potential for asymmetry between risk and return is also high. This means we can only lose 100%, but we could earn ∞ %.
On that basis, we can make an appropriate asset allocation weighting decision and not lose sleep over the volatility of the asset. One final thought regarding asset allocation. For us, Bitcoin belongs in what we refer to as the “legacy bucket” of our asset allocation, as in, it’s for the benefit of future generations of beneficiaries, not us. Capital allocated to this should not be required to support future lifestyle expenses.
OK, enough about the should you or shouldn’t you question. Good luck with that.
Now to the matter of how to do it if you’ve decided to take the leap.
As most Bitcoin maximalists will tell you, the only way to own Bitcoin is through self-custody. As the saying goes, “Not your keys, not your coins.” This phrase emphasizes the first principle of self-sovereignty in Bitcoin. If someone else holds the keys, they effectively control the coins. While it is the ideal way for investors to hold Bitcoin, it remains impractical for most. This is because most investors lack the technical skills to store their keys or simply do not want the responsibility of safekeeping.
So, does this mean you should just forget about investing in Bitcoin if you are not willing or able to own it via self-custody?
In a word, no. Bitcoin ETFs offer a convenient, albeit imperfect alternative for investors who prefer not to manage the technical aspects of self-custody. In Canada, the United States, and a growing list of other countries, Bitcoin ETFs provide access to Bitcoin’s underlying value without direct ownership. In Canada, you can even hold these ETFs in registered accounts like your TFSA or RRSP.
But are all Bitcoin ETFs alike? And what should an investor be looking at when considering investing in them?
Some key considerations include:
1. Understand your sources of counterparty risk.
Understanding the sources of counterparty risk in Bitcoin ETFs is crucial. If Bitcoin ETF gains exposure to Bitcoin through futures contracts or derivatives, it introduces a source of counterparty risk (i.e., the issuer of the derivatives fails to meet their obligations). This means your risk now includes the creditworthiness of the derivative issuer, in addition to the underlying Bitcoin risk. ETFs that invest in futures contracts or derivatives may face additional risks, including regulatory uncertainties, higher management fees, market manipulation, and tracking errors. These factors can cause discrepancies between the ETF’s performance and Bitcoin’s actual price.
However, if the ETF invests in Bitcoin directly, the counterparty risk is associated only with the creditworthiness of the ETF issuer and the custodian. ETF’s direct investment in Bitcoin eliminates the intermediary risks associated with derivatives issuers, providing a more straightforward exposure to Bitcoin’s price movements, but doesn’t eliminate counterparty risk entirely.
2. What security measures are in place for securing the underlying Bitcoin?
The next crucial factor to consider is the security measures employed by the issuer of a Bitcoin ETF to ensure the safekeeping of the Bitcoin. This often involves working with custodial providers to manage private keys and ensure asset security through measures like multi-signature wallets and cold storage. Understanding the issuer’s security practices is crucial because it directly impacts the safety and integrity of the Bitcoin held by the ETF. Many custodians also offer insurance coverage for the Bitcoin they hold, protecting investors against theft, hacking, or other breaches. It’s important to understand the specifics of the insurance policy, as coverage can vary.
3. Creditworthiness of the issuer, Liquidity, and Fees.
When evaluating ETFs, the creditworthiness of the issuer is crucial for any type of ETF. The financial stability and reputation of the issuer are critical; a reliable issuer will comply with regulatory requirements, provide transparent information, and have a solid track record. This ensures that the ETF is managed responsibly and that the underlying assets are secure. Creditworthiness also means that if something goes wrong with the ETF due to mismanagement or counterparty error, you are more likely to recoup your losses.
For those considering Bitcoin ETFs, it’s important to view your investment as a long-term strategy. However, liquidity is also important, as it ensures you can redeem the value of your ETF holdings quickly and easily if needed. While fees should not be the first consideration, they can be a deciding factor once you have narrowed down your choices between similar ETFs.
By carefully considering these factors, investors can make more informed decisions and better manage the risks associated with Bitcoin ETFs. Below is a list of Bitcoin ETFs that we believe are acceptable options based on the characteristics mentioned above. Please note that this is not investment advice, and you should consult your advisor before investing.
1. The CI Galaxy Bitcoin ETF (BTCX.B.TO, BTCX.U.TO) – both CAD and USD
Safe Keeping Policy: “Custodial Services: The ETF uses Galaxy Digital Capital Management LP as its sub-advisor, which is known for its institutional-quality fund platform. Cold Storage: The Bitcoin is stored in cold storage, meaning it is kept offline to protect against hacking and cyber threats. Multi-Signature Wallets: The ETF employs multi-signature wallets, which require multiple private keys to authorize transactions, adding an extra layer of security.”
Creditworthiness: CI is one of Canada’s largest investment management companies, with a long history in the financial industry, and this specific ETF holds 1.27 billion of AUM.
MER: 0.8%
Known for: For being one of the larger Bitcoin ETFs in Canada in terms of AUM and is one of the best performing. Also has both USD and CAD ETFs available for investors.
2. Fidelity Advantage Bitcoin ETF (FTBC) – CAD
Safe Keeping Policy: “Custodial Services: Fidelity uses its subsidiary, Fidelity Digital Assets, to provide custodial services. This subsidiary is known for its institutional-grade security measures. Cold Storage: The Bitcoin is stored in cold storage, meaning it is kept offline to protect against hacking and cyber threats. Multi-Signature Wallets: The ETF employs multi-signature wallets, which require multiple private keys to authorize transactions, adding an extra layer of security.”
Creditworthiness: Fidelity Investments, is a highly reputable and creditworthy asset management firm. One of the two largest asset managers in the world, which provides confidence in the management and operational integrity of its ETFs. With this specific ETF holding 1 billion of AUM.
MER: 0.39%
Known for: A Canadian Bitcoin ETF with strong performance and low fees. Fidelity is considered a leader in the Bitcoin space, under the leadership of their CEO Abigail Johnson who is a trailblazer in bringing Bitcoin to retail investors.
3. iShares Bitcoin Trust ETF (IBIT) – USD
Safe Keeping Policy: “Custodial Services: IBIT leverages Coinbase Prime, a leading institutional digital asset custodian, to manage the Bitcoin. Coinbase Prime is known for its robust security measures and extensive experience in handling digital assets Cold Storage: The Bitcoin is stored in cold storage, meaning it is kept offline to protect against hacking and cyber threats. Multi-Signature Wallets: The ETF employs multi-signature wallets, which require multiple private keys to authorize transactions, adding an extra layer of security.”
Creditworthiness: The iShares Bitcoin Trust ETF (IBIT) is managed by BlackRock, the world’s largest asset manager, whose strong reputation and extensive experience in the financial industry contribute to the creditworthiness of the iShares Bitcoin Trust ETF. While IBIT is not registered under the Investment Company Act of 1940 and therefore not subject to the same regulatory requirements as registered ETFs, BlackRock’s involvement provides a level of confidence in the management and security of the ETF.
MER: 0.25%
Known for: Being one of the largest Bitcoin ETFs with 52 billion of AUM and one of the lowest fees.
This commentary is provided for information purposes only. Commentary is for discussion purposes only and NOT a recommendation to buy or sell securities. All opinions and estimates contained in this report constitute NCP’s judgment as of the time of writing and are provided in good faith. All data, facts, and opinions presented in this document may change without notification. No use on NCP Digital Family Offices’ (NCP) name or any information contained in this report may be copied or redistributed without the prior written consent of NCP. This is presented in part by Picton Mahoney Asset Management.