New exchange-traded crypto funds launched in Canada today will be the first to pay a monthly return

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Toronto-based fund manager who launched the world’s first bitcoin exchange-traded fund (ETF) earlier this year unveils three new funds on the TSX on Tuesday that will be the first crypto assets traded on stock markets that will earn a monthly return .

Purpose Investment’s new funds target investors looking to invest their money in the volatile world of cryptocurrencies, such as bitcoin or ethereum, through more traditional investment vehicles.

An exchange-traded fund is similar to a mutual fund in that it is a collection of assets that are pooled together. Unlike a mutual fund, however, an ETF trades on an exchange, making it easier for ordinary people to buy, sell, and trade them.

Last spring, Purpose launched what was then the world’s first ETF traded on a major exchange that offered investors direct exposure to bitcoin. Many more have jumped in since then, keeping pace with the growing interest in cryptocurrencies.

At last count, Purpose’s most traded bitcoin fund contained over 24,000 bitcoins. At current bitcoin prices, this reserve is worth billions.

“Our bitcoin and ether ETFs [are] now $ 2.5 billion in assets, ”Purpose CEO Som Seif said in an interview with CBC News.

The advent of ETFs that trade on major stock exchanges has allowed people to buy crypto assets the same way they buy stocks or bonds: through the banks and brokers they use to manage their RRSPs. or TFSA rather than through digital wallets and bitcoin dealers.

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Seif strongly believes in the future of cryptocurrencies, but it is far from a universal vision.

Bitcoin mining, which relies on powerful computers constantly running programs that solve mathematical problems, has been singled out for its massive environmental footprint, for example, with some believing that the sector consumes more energy every day than some. country.

While backers praise cryptocurrencies for their security, this feature is also what makes them a convenient way for criminals to move and launder money.

Bitcoin enthusiasts like to compare it to digital gold, but that claim doesn’t stand up to scrutiny either. This is partly why many countries and central banks have tried to crack down on it, with China going so far as to declare it “illegal” last month.

Despite these red flags, investors continue to pour money into space, which is why Purpose tries to satisfy them by embracing volatility while trying to compensate for it.

One fund, the Purpose Bitcoin Yield ETF, will invest in bitcoin. A second, the Purpose Ether YieldETF, will hold another widely used cryptocurrency known as ethereum.

Both will use what is called a covered buy strategy to generate income from the fund’s holdings, which income will be distributed monthly to those who hold units of the fund.

This is a strategy that has been used before with other assets, like oil and gold, but never with cryptocurrencies.

By design, funds reduce some of the potential benefits of investing directly in a volatile cryptocurrency that can reach impressive peaks, but that compensates for this by giving investors a small trickle of income even when the price drops.

New bitcoins are released when computers, called miners, solve complex mathematical formulas. Typically, bitcoin mining is a huge operation that requires huge amounts of energy to operate. (Andrey Rudakov / Bloomberg) Goal promises healthy returns

Unlike a stock dividend, which typically pays a predictable and steady amount on a regular basis, the amount of money the funds pay out monthly will vary.

“We expect that will yield a pretty high return, north of eight percent for sure,” Seif said. “But we think it will pay double-digit returns over time.”

This is far from a guarantee, because ultimately the value of the units of the funds will be indexed to the price of bitcoin or ethereum.

But if these returns can be achieved, they compare favorably with the income that can be produced by dividend-paying stocks.

The yield of the 60 largest dividend-paying companies on the Toronto Stock Exchange today, for example, is about 2.5 percent. But these stocks are also much less likely to have days where they drop 10% or more, which can and does happen to cryptocurrencies quite frequently.

While bitcoin recently hit an all-time high above US $ 66,000 and more than doubled in value this year, it hasn’t moved in a straight line, swinging wildly up and down.

Seif says the new funds are for investors who don’t want to overcome those peaks and troughs by taking advantage of this volatility and buying financial derivatives that can take advantage of it.

“In today’s volatile environment… you can still participate in some upside but still generate a very attractive return,” Seif said.

The 3rd fund expands beyond simple cryptocurrencies

A third fund, the Purpose Crypto Opportunities ETF, is not designed to pay monthly income, but gives investors the opportunity to broaden their exposure beyond cryptocurrencies and to other parts of the ecosystem. crypto, including chipmakers like NVidia, trading platforms like Coinbase and Robin Hood, or even companies with large amounts of cryptocurrency on their books, like Tesla.

“It gives people a unique crypto return stream that they don’t otherwise get by just buying bitcoin or ether directly,” Seif said.

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The first two funds will have a management expense ratio, or MER, of 1.1%, which means that 1.1% of the money invested in the fund will go to the fund manager each year, regardless of the performance. fund.

Since it will be more actively managed, the third fund will have a slightly higher MER of 1.25%.

Expect the unexpected

Seif is bullish on the long-term cryptocurrency space, but the short-term history shows how high and low it can be. Around the same time last year, a single bitcoin was worth around US $ 20,000. In April 2021, it was worth over $ 60,000, before Tesla CEO Elon Musk took the industry’s breath away by announcing that his company would no longer accept it as a form of payment.

It fell to $ 30,000 in July, before resuming its rally, peaking at just over $ 67,000 earlier this month. It was trading at around $ 58,000 on Monday as it was swept away by the wave of panic selling that hit stocks and oil prices on Friday in part due to offers on the omicron variant of COVID-19

Currency analyst Edward Moya with foreign exchange firm Oanda said that in this context, bitcoin “is likely to struggle to fully regain its pace until the results of the vaccine’s effectiveness in the coming weeks. confirm that highly vaccinated countries are not returning to lockdown mode ”.

Bloomberg Intelligence analyst Mike McGlone agrees that bitcoin could have some room to fall in the near term at least.

“I see initial bitcoin support around $ 50,000 and I don’t see it dropping well below $ 40,000 on some more macro fading sort of thing,” he said in an email.

Longer term, however, McGlone is a strong supporter of cryptocurrency, and he believes the price of bitcoin may well hit $ 100,000 at some point next year.

One of the main reasons for his optimism is that as cryptocurrencies become more mainstream and investors have more ways to buy them, it will instill confidence and create demand. “Bitcoin’s techniques and fundamentals remain supportive of increasing adoption and demand,” he said. “ETFs are one of them.”

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