Bitcoin Surge Leaves Original Crypto ETFs Behind -

This year has been remarkable for Bitcoin, yet the pioneers of the first exchange-traded funds containing the cryptocurrency appear to be at risk of lagging behind.

Canada introduced Bitcoin ETFs in February 2021, establishing them as the first in the world. This initiative generated billions in investments from both Canadian and international participants looking to gain exposure to the pioneering cryptocurrency. However, with the approval of US Bitcoin ETFs earlier this year, some investors are beginning to reassess their positions in Canadian crypto assets.

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As of December 13, Canadian Bitcoin ETFs reported C$578 million ($405 million) in net outflows this year, according to data from TD Securities. Notably, crypto ETFs are the only category in Canada that has faced outflows during this timeframe, while US Bitcoin ETFs have generated a staggering $36 billion in inflows up to December 16. Bitcoin itself has soared by over 150% this year.

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

“Larger US and international investors are increasingly leaning towards US ETFs since those markets are where they usually trade all their other assets,” Tasevski explained. “This transition makes sense, given that the US hosts the largest global capital markets and possesses the majority of liquidity.”

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Despite the outflows from international investors in the Purpose Bitcoin ETF (ticker BTCC), Tasevski mentioned a modest net increase in investment from Canadian clients, who account for over 80% of the fund’s approximate C$830 million client base.

One factor keeping Canadian investors engaged is the weakened Canadian dollar. Canadian investors tend to favor using their local currency, and Canadian Bitcoin ETFs can be designated 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 uniquely offer are options to manage currency risks over the long term,” Rincon clarified.

For those switching to US Bitcoin ETFs, a significant advantage is the lower management fees. The Fidelity Advantage Bitcoin ETF boasts the lowest management expense ratio among Canadian Bitcoin ETFs at 0.43%, while several others surpass 1%. Meanwhile, the iShares Bitcoin Trust ETF, the largest Bitcoin ETF in the US, has a sponsorship fee of just 0.25%.

“For Canadian investors, the main factors driving the decision to switch to US spot Bitcoin and Ethereum ETFs generally revolve around fees and liquidity,” said Tiffany Zhang, an analyst at National Bank. “Even small differences in index and management fees can significantly impact ETF returns.”

Zhang highlighted how the staggered launch of these ETFs contributed to differences in management costs. When Canadian Bitcoin ETFs were launched in 2021, Bitcoin was a tougher asset class to access. Now, with amplified competition and accessibility, US ETFs launched this year are positioned to offer lower management fees.

While some Canadian ETFs have subsequently lowered their fees, the enhanced trading volumes of US ETFs make it easier to reduce costs.

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Though 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 investors adopting a more tactical portfolio approach compared to the growth observed in the US,” Cappelli observed. “Therefore, profit-taking and other strategies may influence individual investor decisions.”

The upcoming US presidential election and the expected regulatory changes surrounding cryptocurrencies in the US have provided some reassurance for Canadian funds.

“Since the US election nearly a month ago, demand for Bitcoin has surged; virtually every metric, from outflows to trading volumes and prices, has increased,” Cappelli noted.

Read: US bitcoin ETF inflows near $10bn since Trump election win

Despite a slight post-election boost compared to their US counterparts, these increases have not been sufficient to overturn five consecutive months of outflows for Canadian crypto ETFs, which began after the launch of US ETFs in January.

While Canadian Bitcoin ETFs are projected to conclude the year with negative net flows, TD’s Rincon anticipates growth potential for the crypto ETF sector as anticipated changes at the US Securities and Exchange Commission may enable a wider variety of ETFs.

“It would not 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.

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