Crypto exchange-traded funds (ETFs) have opened up the world of digital coins to regular mom-and-pop investors who might not have the technical know-how or desire to trade directly on crypto exchanges, but want to add exposure to this sector to their investment portfolios.
However, that doesn't mean these ETFs are best suited for everyone.
"We don't believe that speculation is part of a serious, long-term financial plan," Todd Neff, financial advisor, regional leader and principal at Edward Jones, told Yahoo Finance Canada in a phone interview.
Neff, who has been in the financial advisory field for roughly 20 years, says the crypto market hasn't reached a level of maturity and stability that allows those assets to be properly valued, though 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 sort of value to them. And that's the challenge with cryptocurrencies. There's no underlying fundamentals, like cash flow or profits to support the valuation of the currency," he said.
Crypto goes mainstream
Bitcoin arguably first started to wade into the mainstream investment landscape in late-2017 when it traded around US$20,000, a record high at the time, capturing 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 really became known for its wildly volatile swings.
It was February 2021 when Purpose Investments' Bitcoin ETF began trading on the Toronto Stock Exchange in 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, sort of, lowly-regulated online crypto space and putting it into a very highly-regulated ETF structure and providing access to everybody from large institutions to investment advisors to do-it-yourself clients to choose their investments as they wish without being subjected to high barriers of entry," he said in a phone interview.
The Investment Funds Institute of Canada says there were 19 crypto-related ETFs on offer in the country as at 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, leading to potential tax benefits, whereas cryptocurrencies themselves are not eligible to be held in such registered accounts.
Butt also says trading and holding monetary accounts on cryptocurrency exchange platforms require a higher level of technical expertise and can carry heightened cyberhack risks, unlike buying a crypto ETF from an investment firm.
What to consider before jumping in
For investors who want to add crypto exposure to their portfolios, they should follow the same advice they would when 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 per cent. That's a rough rule of thumb. Some people will say more, some people will say less. But I think that that's a good starting point," he said.
He's had a small handful of clients inquire about crypto assets but for the most part, many are hesitant or aren't overly knowledgeable about them.
Understanding risk tolerance is obviously important when buying securities, but for younger investors, Heath says they need to realize their time horizon might not be as long as they think it is because of the various life milestones that can occur in short order.
"A lot of the younger people that are investing in cryptocurrency arguably do not have a long time horizon despite being young because they're going to need money to pay for education, a car, a wedding, a condo or something like that. So, you know, I think that young people in particular need to be careful about investing in more speculative investments," he said.
Crypto ETF alternatives
Bitcoin- and ethereum-related ETFs might 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 themselves is by buying shares of blockchain companies, Heath suggests.
Meanwhile, Edward Jones' Neff says smaller-cap companies can provide exposure to speculative assets for investors that are interested in taking on more risk, even though they're not a direct alternative to cryptocurrencies.
"I would stick to something that's still kind of boring, but can provide more volatility. I would 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.