First, a bit of background on this mysterious new asset class. Bitcoin is a
new form of money called “cryptocurrency.” It’s an entirely digital
currency that has no sovereign backer as does “fiat” currency (i.e., money
created and backed by national governments). Cryptocurrencies are seen by
some observers as the ultimate medium of exchange and the currency of the
Cryptocurrency relies on something called “blockchain technology.” Imagine
a spreadsheet that has no central location, but exists instead as thousands
of copies everywhere that can be used to validate the information and
pertinent changes on any individual ledger.
The technology was initially created to support the existence of a currency
that is not susceptible to the regular security flaws of current forms of
“money,” with an added layer of privacy. No central body is able to
manipulate the currency’s value, and thus its value is based only on the
demand and the current supply.
However, like fiat money, cryptocurrencies can serve all three primary
functions of money as we know it: 1) a medium of exchange for payment of
goods and services; 2) a unit of account in which the value of goods and
services can be expressed; and 3) a store of value, which can be saved and
used to pay for work or goods later.
To make matters even more complicated, several forms of other
cryptocurrencies have emerged since the advent of Bitcoin, and these are
often referred to as “altcoins.” Ethereum may be the most prominent form of
altcoin available in the market, and it has also seen unprecedented growth
of over 70,000% in two years. Other notables in the list are Litecoin,
Zcash, and even one comically named PotCoin. The latter, as the name
suggests, aims to become the standard form of payment for the legalized
Beyond the economics and public intrigue of cryptocurrencies, portfolio
managers and analysts are also beginning to take notice. Majestic Asset
Management recently launched Canada’s first cryptocurrency fund.
Rivemont Crypto Fund, an unlisted private offering that was launched on Dec. 8, 2017, and is
available for purchase directly from Majestic only to accredited investors
Following in the footsteps of similarly styled funds in the U.S., Rivemont
says the fund will seek to “take advantage of the development of blockchain
technology by identifying the most promising cryptocurrencies.” The fund
aims initially to invest heavily in Bitcoin and Ethereum futures, and will
eventually invest directly in the cryptocurrencies and other altcoins as
they become available and gain a credible track record.
The fund itself will hold futures contracts traded on the CBOE and CME
markets. The digital currencies will trade on Gemini Trust, an exchange
platform founded by Tyler and Cameron Winklevoss, twin brothers who have
become billionaires from owning Bitcoin. You may also recognize them as the
brothers who won a $65 million lawsuit against Facebook, alleging that
founder Mark Zuckerberg stole their idea for social networking while they
were all undergraduates at Harvard.
However, the regulatory kinks involved in cryptocurrency funds are still
being ironed out on both sides of the border. While hedge funds have the
flexibility of betting on digital currencies, recent efforts to bring a
cryptocurrency ETF to Wall Street have been derailed by the U.S. Securities
& Exchange Commission (SEC), which cited lack of regulatory systems for
cryptocurrencies and the potential for undue volatility in capital markets.
Just this past week, two U.S. financial services companies, ProShares and
VanEck, withdrew requests to list cryptocurrency ETFs on the NYSE.
Regulators may have legitimate reasons for concern. Bitcoin and Ethereum
have both had unprecedented growth in the last few years. Many skeptics are
quick to suggest the existence of a bubble, which they say is bound to
burst in the near future. The recent drop in Bitcoin prices by 22% over a
four-day period in December 2017 may have been all the signs that
risk-averse investors needed to avoid these currencies.
Stephen Poloz, the Governor of the Bank of Canada, recently voiced his
concerns about cryptocurrencies in an address on Dec. 14 to the Canadian
Club aptly titled, “Three Things Keeping Me Awake at Night.” Among other
things, he pondered the larger implications of the arrival of
cryptocurrencies, which he argued were misnamed as currencies, and their
potential effects on the cash in our pockets. He also dismissed their value
as a “currency” because of their volatility, noting that a currency must
act as a reliable store of value. The tax authorities agree, as both the
Canadian Revenue Agency and U.S. Internal Revenue Services view
cryptocurrencies as securities on which any capital gains may be taxed.
The circumstances surrounding the situation are quite evidently fluid.
Details are changing weekly, if not daily. The legal status of
cryptocurrencies as either a security or a currency is under fiery debate,
and the volatility of their values has made them prone to constant
scrutiny. It seems likely that the debate will continue for some time.
Bottom line: For cryptocurrencies, their derivatives, and funds that invest
in them, it’s truly a case of “buyer beware”!
Sayem Hossain is Analyst, Analytics & Data, at
Fundata Canada Inc., a leading source for investment fund information.
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