This year has been remarkable for Bitcoin; however, the innovators behind the world’s first cryptocurrency exchange-traded funds (ETFs) may find themselves lagging.

Canada introduced Bitcoin ETFs in February 2021, becoming the first globally to do so. This initiative led to billions in investments from both Canadian and international investors looking for exposure to the pioneering cryptocurrency. Nevertheless, following the approval of Bitcoin ETFs in the US earlier this year, some investors have begun rethinking their investments in Canadian crypto assets.

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As of December 13, Canadian Bitcoin ETFs have seen net outflows of C$578 million ($405 million) this year, according to data from TD Securities. Interestingly, crypto ETFs are the sole segment in Canada registering outflows during this timeframe, whereas US Bitcoin ETFs have garnered an outstanding $36 billion in inflows through December 16. Bitcoin itself has skyrocketed over 150% this year.

Vlad Tasevski, head of asset management at Purpose Investments, which launched the world’s first Bitcoin ETF, remarked that some American investors who previously supported Canadian Bitcoin ETFs have now switched to US-based options.

“Larger US and international investors now favor US ETFs, as these markets are typically where they execute all their other trades,” Tasevski stated. “This transition is not surprising, given that the US hosts the largest global capital markets and holds the majority of liquidity.”

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Despite international investor outflows from the Purpose Bitcoin ETF (ticker BTCC), Tasevski observed a slight increase in investments from Canadian clients, who account for over 80% of the fund’s estimated C$830 million clientele.

One reason Canadian investors might be holding onto their investments is the depreciating Canadian dollar. Typically, Canadian investors prefer to use their local currency, and Canadian Bitcoin ETFs can be priced in Canadian dollars and hedged, as noted by Andres Rincon, head of ETF sales and strategy at TD Securities.

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

Those shifting to US Bitcoin ETFs often enjoy the advantage of lower management fees. The Fidelity Advantage Bitcoin ETF has the lowest management expense ratio among Canadian Bitcoin ETFs at 0.43%, while many others exceed 1%. Conversely, the iShares Bitcoin Trust ETF, the largest Bitcoin ETF in the US, features a sponsorship fee of 0.25%.

“For Canadian investors, the main reasons for considering a switch to US spot Bitcoin and Ethereum ETFs revolve around fees and liquidity,” noted Tiffany Zhang, an analyst at National Bank. “Even minor differences in index and management fees can significantly impact ETF returns.”

Zhang highlighted that the varying launch times of these ETFs have led to differences in management expenses. When Canadian Bitcoin ETFs launched in 2021, Bitcoin was difficult to access. Now, with increased competition and availability, US ETFs that emerged this year have been able to provide lower management fees.

While some Canadian ETFs have lowered their fees since their launch, the greater trading volumes of US ETFs allow for more feasible cost reductions.

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Although US Bitcoin ETFs have impacted the Canadian market, they aren’t the sole factor contributing to the ongoing outflows, according to Paul Cappelli, head of ETF strategies at Galaxy.

“The Canadian Bitcoin ETF market has matured, leading to investors employing more tactical portfolio management as opposed to the growth pattern we’ve seen in the US,” Cappelli observed. “Thus, strategies like profit-taking could be influencing individual investor decisions.”

The upcoming US presidential election and anticipated shifts in the regulatory landscape for cryptocurrencies in the US have provided some degree of reassurance for Canadian funds.

“Following the US election nearly a month ago, Bitcoin demand has surged; virtually all metrics, from outflows to trading volumes and pricing, have risen,” Cappelli added.

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

Despite a minor post-election increase compared to their US counterparts, these gains have not been enough to counteract five consecutive months of outflows in Canadian crypto ETFs that began after the launch of US ETFs in January.

While Canadian Bitcoin ETFs are predicted to end the year with negative net flows, TD’s Rincon envisions potential growth in the crypto ETF sector as forthcoming changes at the US Securities and Exchange Commission may lead to a wider selection of ETFs.

“It wouldn’t be surprising to see more filings in the US, including for additional cryptocurrencies, with some of those possibly moving to Canada as well,” he commented.

© 2024 Bloomberg

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