Dan Hallett is vice-president and principal of Highview Financial Group
I have often criticized the investment industry for pumping out products designed to sell rather than build wealth for investors. I have also worked to raise investor awareness of how gimmicky products destroy wealth. The battle against such products took a step backward recently with an Ontario Securities Commission panel’s decision to allow the launch of a bitcoin investment fund.
The OSC’s Investment Funds Branch was initially opposed to the fund; citing several concerns pertaining to public interests. The panel’s decision document clearly lays out the OSC’s legal limits when it comes to approving products that are considered risky and speculative. Ultimately, the panel concluded that the fund will be able to reliably value the fund’s assets, secure the holdings (from hacks/theft) and complete a full financial audit.
Many look to bitcoin – and other assets such as gold and other commodities – to provide diversification from traditional financial assets. An investment must meet two basic conditions for it to effectively diversify a portfolio. First, it must be weakly correlated with other investments. Second, it must produce a positive return. Bitcoin passes the first test with flying colours. But the second – a positive return – is quite a leap of faith, and violates the warning attached to virtually all investment products.
Regulators have long required every investment fund prospectus to be stamped with a statement reminding investors that past performance is no indication of the future. And yet, it seems that any assumption that bitcoin offers portfolio diversification is implicitly based on bitcoin’s performance during its one decade in existence. This is a drop in the bucket of financial market history. But there are two problems with this assumption.
First, we have no idea – even using history – how bitcoin will…