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Confidence in the U.S. banking system was shaken recently as Silicon Valley Bank (SVB) failed amidst a bank run. As mark-to-market losses in its fixed-income portfolio became public knowledge, depositors rushed to withdraw their money. Ultimately, Federal regulators were forced to step in and guarantee all deposits in order to forestall widespread contagion in the regional banking industry.
Across the sea, turmoil in the European banking sector unfolded simultaneously as Credit Suisse was acquired by competitor UBS in a last minute “shotgun marriage” officiated by the Swiss Central Bank. As the U.S. Federal Reserve and U.K. central banks to continue to press forward with 0.25 basis point interest rate hikes, the stress in the global baking system continues to be felt.
On the decentralized finance (de-fi) end, cryptocurrencies like Bitcoin are seeing a strong resurgence after a brutal bear market in 2022. Year-to-date as of March 23, the price of Bitcoin is up 70% in U.S. dollars. Without any catalysts on the horizon, or the help of low interest rates, it’s likely that this pump is fueled by fear of contagion in banking as investors seek an alternative.
A fallacy of trust and decentralization
Bitcoin has its roots firmly in libertarian ideals. In its whitepaper, “Satoshi Nakamoto” envisioned it as a peer-to-peer, decentralized alternative, which could bypass the need to rely on financial institutions for transactions. That is, Bitcoin could allow individuals to transact money without a third party.
By sending Bitcoin peer-to-peer, individuals theoretically no longer had to worry about counterparty risk. After all, there’s no risk of a bank run if you are your own bank. The goal of many Bitcoin maximalists has thus been “self-custody”, referring to the practice of safeguarding your Bitcoin in cold (offline) storage and keeping your private key safe and secure.
That being said, some crypto investors clearly do not adhere to these ideals. One only needs to look at the vast number of individuals burned by high-profile crypto disasters like the TerraUSD stablecoin collapse, the Voyager, Celsius, BlockFi, and FTX collapses, and the recent USDC de-pegging to realize that despite Nakamoto’s original intentions, counterparty risk is still rife in crypto.
While some so-called “Bitcoin Maximalists” hoard their Bitcoin like digital gold and regard centralized institutions like exchanges as untrustworthy, others rely on these institutions to transact in cryptocurrencies and speculate on them. The crowd of investors who stake cryptocurrency for yield or buy altcoins to go “to the moon” have taken center stage.
And therein lies the contradiction of cryptocurrency: contrary to Satoshi’s vision, crypto has become a wasteland of centralized entities that are systematically important to the crypto ecosystem, yet subject to less regulation and risk management than traditional banks are. There are even “whales” and central, widely revered figures in cryptocurrency like Changpeng Zhao and Vitalik Buterin.
In a way, the crypto environment currently looks like the “wild west” days of banking, where rug-pulls, Ponzi schemes, bank runs, and a lack of investor confidence were commonplace, and regulators slow to catch up. Celsius’ motto was “unbank yourself” – a small comfort to its depositors who were locked out of their assets following a Chapter 11 bankruptcy filing.
Exploring Bitcoin ETFs as an alternative
So, it seems that for many, Bitcoin and cryptocurrency ownership can take two extreme forms: complete self-custody, or trust in an exchange. The former offers security, while the latter offers liquidity. But what if there was an alternative that was also tax-efficient?
I think there could be a case for considering Bitcoin ETFs. In Canada, these ETFs are regulated to a strict degree like any other ETF, with strong accounting oversight and risk management practices. Most of these ETFs store their underlying Bitcoin in cold storage with trusted custodians.
Unlike self-custody, investors do not need to keep track of their seed phrase or worry about being duped into giving up their private key. Compared to on-exchange hot wallets, ETFs cannot be hacked, and strong investor protections like the Canadian Investor Protection Fund (CIPF) exist.
Finally, unlike Bitcoin, Bitcoin ETFs are deemed “qualified investments” and can be held within a TFSA or RRSP, allowing for tax-free or tax-deferred capital gains. The downside is the management expense ratio, but this is small compared to the convenience of trading in a brokerage account.
The following ETFs provide exposure to Bitcoin via physically backed deposits in cold storage. Most of them come in currency hedged, unhedged, and U.S. dollar denominated variants. For more information on how these ETFs work, their fees, and risks, give this article and their respective NEO pages a read.
- CI Galaxy Bitcoin ETF (BTCX.B)
- Purpose Bitcoin ETF (BTCC.B)
- Evolve Bitcoin ETF (EBIT)
- 3iQ CoinShares Bitcoin ETF (BTCQ)
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.