Bitcoin Surge Leaves Original Crypto ETFs in the Dust -

This year has proven to be extraordinary for Bitcoin; however, the founders of the first exchange-traded funds featuring the cryptocurrency may risk lagging behind.

Canada introduced Bitcoin ETFs in February 2021, marking their position as the first globally. This milestone led to billions in investments from both Canadian and international investors looking to gain exposure to the pioneering cryptocurrency. Nonetheless, with the approval of US Bitcoin ETFs earlier this year, some investors have begun to reconsider their stakes in Canadian crypto assets.

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As of December 13, Canadian Bitcoin ETFs have faced C$578 million ($405 million) in net outflows this year, according to data from TD Securities. Significantly, crypto ETFs stand as the only category in Canada to record outflows during this timeframe, whereas US Bitcoin ETFs have garnered an impressive $36 billion in inflows by December 16. Bitcoin itself has surged over 150% in value this year.

Vlad Tasevski, head of asset management at Purpose Investments—which launched the world’s first Bitcoin ETF—indicated that some American investors who initially supported Canadian Bitcoin ETFs are now shifting towards US-based alternatives.

“Larger US and international investors now favor US ETFs, as those markets are typically where they manage their other investments,” Tasevski commented. “This transition is expected, given that the US contains the largest global capital markets and the majority of liquidity.”

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Despite the outflows in the Purpose Bitcoin ETF (ticker BTCC) from international investors, Tasevski mentioned a slight net increase in investment from Canadian clients, who make up over 80% of the fund’s various C$830 million clientele.

One reason Canadian investors may be holding onto their investments is the weaker Canadian dollar. Canadian investors generally prefer transactions in their local currency, and Canadian Bitcoin ETFs can be denominated in Canadian dollars and hedged, according to Andres Rincon, head of ETF sales and strategy at TD Securities.

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“What Canadian ETFs offer uniquely are options for managing currency risks over the long term,” Rincon explained.

For investors switching to US Bitcoin ETFs, a major advantage includes lower management fees. The Fidelity Advantage Bitcoin ETF offers the lowest management expense ratio among Canadian Bitcoin ETFs at 0.43%, while many others exceed 1%. The iShares Bitcoin Trust ETF, the largest Bitcoin ETF in the US, carries a sponsorship fee of 0.25%.

“For Canadian investors, the key factors for switching to US spot Bitcoin and Ethereum ETFs revolve primarily around fees and liquidity,” noted Tiffany Zhang, an analyst at National Bank. “Even slight differences in indices and management fees can significantly impact ETF returns.”

Zhang emphasized that the differing launch timelines of these ETFs contributed to the management expense variations. When Canadian Bitcoin ETFs launched in 2021, Bitcoin was a difficult asset class to access. Now, with heightened competition and accessibility, US ETFs originating this year have managed to provide lower management fees.

While several Canadian ETFs have subsequently lowered their fees, the larger trading volumes of US ETFs facilitate cost reductions more effectively.

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Although US Bitcoin ETFs have impacted the Canadian market, they are not the sole reason for the ongoing outflows, according to Paul Cappelli, head of ETF strategies at Galaxy.

“The Canadian Bitcoin ETF market has matured, leading us to observe that investors are adopting more tactical portfolio management rather than the growth pattern seen in the US,” Cappelli remarked. “Therefore, profit-taking and alternative strategies may influence individual investor decisions.”

The upcoming US presidential election and anticipated regulatory changes for cryptocurrencies in the US have offered some reassurance to Canadian funds.

“Since the US election about a month ago, demand for Bitcoin has significantly increased; virtually every metric, including outflows, trading volumes, and price, has risen,” Cappelli added.

Read: US bitcoin ETF inflows approach $10 billion since Trump election victory

Despite a slight post-election boost compared to their US counterparts, these gains have not been adequate to reverse five consecutive months of outflows for Canadian crypto ETFs since the introduction of US ETFs in January.

While Canadian Bitcoin ETFs are set to conclude the year with negative net flows, TD’s Rincon anticipates potential growth in the crypto ETF sector, as upcoming changes at the US Securities and Exchange Commission could lead to a broader range of ETFs.

“It would not be unexpected to witness more filings in the US, including for additional cryptocurrencies, with some potentially relocating to Canada as well,” he suggested.

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