All too easy: crypto ETFs are risky lure

Financial advisers will be able to put everyday investors into crypto with the launch of specialised exchange traded funds, but should you buy into them?

Graham Tuckwell of ETF Securities, which is to offer bitcoin and ethereum ETFs. Picture: Ray Strange.

Wandering through the Adelaide Convention Centre this week at one of the first post-Covid superannuation conferences, it looked like things were almost back to normal. About 1000 financial advisers managed a meet-and-greet courtesy of the Self Managed Super Fund Association.

But there was one key difference to previous events: dotted among the usual suspects – Magellan, Charter Hall et al – were a string of less familiar operators with names such as Independent Reserve and BTC Markets.

Who are these guys? They are cryptocurrency exchanges, and they know a honey pot when they see one.

It’s been one of the biggest gaps in the market for years: investors of all ages want to get access to cryptocurrency. If we believe the latest Roy Morgan survey, more than a million Australians already have holdings in crypto. And there are millions more who want to at least know they can play in the sandpit.

Many will ask financial advisers for guidance. Most advisers do not have a clue how it all works. Further, they are often not able to legally give advice. And to top it off, they are most unsure about how to go about opening a digital wallet or whatever else it takes to enter the arena.

Now a solution has arrived: exchange-traded funds (ETFs) much loved by everyday investors for the ability to buy into a sector – think Nasdaq or gold or battery metals – are now allowed to offer crypto coin funds.

Next week, ETF Securities – the fund manager led by tycoon Graham Tuckwell – will bring a bitcoin ETF and an ethereum ETF to the local market. Cosmos Asset Management, a specialist in the area, is also planning to debut its own bitcoin ETF.

And if you think investors are fond of ETFs, advisers just love them for the simple reason that they can tick a box. No worries about approved products or custodian rules any longer.

If the client wants to throw some money in this direction – let’s not say invest – then the ­adviser can promptly point them towards a crypto ETF.

Problem solved!

Well, not so fast.

The short history of crypto has been a rocky ride – and the volatility never ends.

Bitcoin is currently near US40,000 – it was as low as $US32,000 in June last year and struck $US60,000 this time last year. For most of 2019 and 2020 it was available for nearer to $US10,000.

In other words, it’s a story of winners and losers. Actually, in the ETF arena to date it’s mostly about losers.

This is partly due to timing. The first crypto-related funds we have seen in our market coincided with a downturn in crypto.

Although pure-play crypto ETFs – that is, funds based solely on the spot price of an underlying coin – have not been allowed until now, there have been proxy crypto funds where investors have been able to buy into the “picks and shovels” behind the wider industry.

The BetaShares Crypto Innovators ETF was launched in November last year and broke records for the amount of money that flowed into a listed product in its first day of trading. The CRYP fund aimed at covering stocks that engaged in bitcoin mining and blockchain ­infrastructure.

Unfortunately, crypto innovators went through what doomsayer economist Nouriel Roubini tagged as “a massacre” when sentiment turned sour on the sector earlier this year. The BetaShares Crypto Innovators fund is down 45 per cent since those heady days in November when traders scrambled to buy a slice of the fund.

But this may turn out to be a long game – key coins have stabilised in recent times and it is clear the coin trading patterns are correlated to other listed investments.

In fact, the BetaShares Crypto Innovators fund is up 2 per cent over the last month and bitcoin – the bellwether of the entire crypto universe – is up 4.5 per cent over the past month.

Which leaves all potential speculators with that gnawing feeling that another surge in the sector cannot be ruled out.

If and when that surge happens, everyone is now better prepared. Once the mood turns in this space, sentiment improves towards everything crypto-related, from coins, to blockchain products to NFTs (non fungible tokens).

Regulators will be more tuned in next time – prudential regulator APRA announced moves this week and of course the tax office has been super vigilant on taxing anything that moves in this area since it first saw the light of day.

The unlikely dimension of this story so far is that regulators appeared to have come into crypto backwards. In the US you could trade futures on crypto in funds before you could trade the underlying coins.

Similarly in our market you could buy into the architecture around crypto and blockchain in special funds before you could get a simple ETF based on a coin.

How will retail investors fare in the uncharted waters of low-fee, easy-as-you-like crypto fund ­investing?

The atmosphere on global markets is considerably more sober now than it was at the end of last year – that does not mean money will not flow into any new funds – including ETFs – that bring crypto into the mainstream. But this time around the tempo might be a little more restrained.

As Sarah Abood, the CEO of the Financial Planning Association suggests: “People can speculate if they wish, though I don’t think prudent advisers will be recommending this area as an investment.”

Investors who wish to put some money into this endlessly fascinating, very risky end of the market might take heed off Sina Estavi, the chief executive of Malaysia-based blockchain company Bridge ­Oracle. Last year Estavi paid $2.9m for an NFT based on the world’s first tweet, which came from Twitter co-founder Jack Dorsey.

When Estavi went to sell his NFT on the Openseas platform this month, the bids were in the order of $US14,000.

The message remains the same – ETFs or no ETFs, only play in the sandpit if you are prepared to lose most of your money.