As cryptocurrencies move higher, one fund provider has shifted their strategy

Bitcoin and Ether have jumped higher once again. By the morning of Tuesday October 24th, both cryptocurrencies had enjoyed over 5% gains – with bitcoin climbing back above $45,000 CAD in value. While the space is known for its volatility, the CEO of one digital asset manager believes that structural and regulatory changes are setting the stage for a strong 2024 in crypto.

Fred Pye, Chairman & CEO of 3iQ Corp, explained some of why he’s seeing these assets gap higher right now. He outlined some of the expectations for regulatory change and laid out why he’s shifting the strategy of two of his funds to begin a process known as ‘staking,’ he thinks that as more options become available to investors, they may see a greater degree of attraction in holding cryptocurrencies.

“We have seen both Ether and Bitcoin break out through a technical level this week, because people have come to the realization that [crypto] ETFs will be approved in the United States,” Pye says. “Therefore, I think most investment advisors worldwide will be allowed to buy Bitcoin and Ether products. It’s inevitable, and what you’re seeing now is the rush in demand to get in before the announcement allows everyone to buy.”

The backdrop for that approval, Pye says, is a US regulatory framework that is following a path set in Canada. He argues that Canada is “leading the rest of the world” in the adoption of investable assets tied to cryptocurrencies. Regulators in Canada and the US have hired analysts to develop regulations around blockchain, and he believes those analysts are inherently pro-blockchain, shifting regulatory opinion towards greater acceptance and flexibility of cryptocurrency investment funds and ETFs.

Canadian approval of new crypto ‘first’

Pye attributes that regulatory leadership in Canada to the launch of two new ‘first’ in Canada strategies from his firm. 3iQ Digital Asset Management last week announced that their two Ether products, The Ether Fund and the 3iQ Ether ETF, would begin a process known as ‘staking.’

Staking can be seen as an alternative to cryptocurrency ‘mining’ as both processes are used to mint new units of a cryptocurrency and secure their underlying network. Mining involves completing complex calculations — requiring huge amounts of computational power.

Staking, conversely, involves holders of a cryptocurrency maintaining a large quantity of the currency to validate and secure the network. That currency stake would require any attacker to hold an even larger quantity of the currency, which is likely impossible. The individuals who put their assets up as part of the stake are then rewarded with more units of the cryptocurrency.

While Bitcoin uses mining to secure and mint units, Ether uses staking. By engaging in staking on its two Ether funds now, 3iQ’s chairman and CEO explains that Canadian investors will be able to access the value of Ether and its capital appreciation opportunities, while receiving a yield of between 3% and 5% as a reward for staking.

As part of their rollout of the staking strategy, 3iQ has waived the management fee until March 31, 2024 on the 3iQ Ether ETF, which will be renamed the 3iQ Ether Staking ETF (ETHQ). They will manage expenses in the form of a “staking service fee” which will take 25% of the awards from staking collected by the fund. Rather than distributing all those awards to unitholders, the staking service fee will make up 3iQ’s revenue from management.

Pye justifies this shift by nothing the considerable amount of legal and regulatory work that was required to get these strategies approved by the OSC. He notes, as well, that the removal of any management fee should counteract the 25% cut of staking rewards that 3iQ will take on the product. According to The Globe and Mail before the management fee was waived ETHQ charged a 1.00% fee.

Is crypto worth reconsidering?

While cryptocurrencies have been the subject of considerable hype, volatility, and scandal over the past few years, Pye believes that a staking strategy like his can help advisors re-enter the space. He argues that blockchain-backed digital assets like Ether are a ’15-year story’ and that cryptocurrency values are likely to rise long-term.

As investors and advisors seek non-correlated asset classes, Pye also thinks that his ETFs can help. He argues for a small degree of cryptocurrency exposure to improve total return and reduce volatility and notes two major developments that should increase the overall value of cryptocurrencies like Ether: US regulatory approval and a Bitcoin halving.

Every few years the rate of bitcoin minting is cut in half, constricting the supply of the asset. At the same time, Pye expects that when the SEC approves crypto ETFs, demand for cryptocurrencies will skyrocket just as their supply constricts, pushing values higher.

Pye accepts that some of the individuals who bought into crypto during Bitcoin’s peak in 2021 will still be “underwater,” but argues that those peaks were brief. He likens crypto volatility to growth stocks like Tesla and Amazon, and argues that since the onset of the pandemic, assets like Bitcoin have managed to deliver around 10x in total returns.

“I think investment advisors are realizing that the asset class is here to stay,” Pye says. “The correlation between digital assets and the regular market is very small, but the correlation amongst digital assets is very high. In that context, should people buy Bitcoin, or Ether? The reality is they should own both and both are going to move the same way. But you get paid for holding the ether asset when somebody is allowed to do the staking for you like we are.”