Bitcoin Rally Leaves the World’s Original Crypto ETFs Behind

By Investor Empires On Dec 18, 2024

(Bloomberg) — In a record-breaking year for Bitcoin, the creators of the world’s first ETFs holding the cryptocurrency appear at risk of being left behind.

Most read from Bloomberg

Bitcoin ETFs launched in Canada in February 2021, making them the first in the world. This led to billions of dollars in inflows from Canadian and foreign investors who wanted exposure to the original digital currency. But when US bitcoin ETFs were approved earlier this year, some investors began to reconsider their investments in Canadian cryptocurrencies.

Bitcoin ETFs in Canada have seen net outflows of C$578 million (US$405 million) so far this year through Dec. 13, according to data compiled by TD Securities Inc. Bitcoin ETFs saw record inflows of $36 billion through December 16. Bitcoin has risen more than 150% this year.

Some U.S. investors who invested in Canadian bitcoin ETFs have now turned to U.S.-based funds, according to Vlad Tasevsky, head of asset management at Purpose Investments Inc., which had the world’s first bitcoin ETF.

“Large U.S. and international investors who now prefer to use U.S. ETFs because these are the markets in which they mostly trade all of their other exposures,” Taszewski said. “But this was expected because ultimately we know that the United States is the largest global capital market, where most of the liquidity is.”

While the Bitcoin ETF (ticker BTCC) has seen outflows from international investors this year, Tassevsky said there has been an uptick in net inflows from Canadian investors, who make up more than 80% of the client base of about C$830 million. finance.

For Canadian investors, a weak Canadian dollar may help them keep their investments in the country. Canadians prefer to invest in their local currency and Canadian bitcoin ETFs can be Canadian dollar-denominated and hedged, according to Andres Rincon, head of ETF sales and strategy at TD Securities.

“What Canadian ETFs really give you are options to manage your currency risk over the long term, and that’s something that’s really unique to Canadian ETFs,” Rincon said.

For investors switching to US Bitcoin ETFs, one potential benefit is lower management fees. The Fidelity Advantage Bitcoin ETF has the lowest management expense ratio of Canadian Bitcoin ETFs at 0.43%, while many other funds have ratios higher than 1%. The iShares Bitcoin Trust ETF, the largest U.S. bitcoin ETF, has a sponsorship fee of 0.25%.

“The most important reason why Canadian investors prefer U.S. spot bitcoin and ethereum ETFs in this case is actually the fees and liquidity,” said National Bank analyst Tiffany Zhang. “The slightest difference in the index you use as well as the management fees will be the biggest drag on ETF returns.”

The timing of the launch of these ETFs contributed to the difference in management expenses, Zhang said. When Canadian Bitcoin ETFs launched in 2021, the Bitcoin asset class was difficult to access, but since Bitcoin is now easier to gain exposure to and there is much more competition, US ETFs were launched earlier in the year. This year with lower management fees.

Some Canadian ETFs have since reduced their fees, but with US ETFs having a larger trading volume, it is easier for US funds to cut costs.

While US bitcoin ETFs have impacted the Canadian market, they are not the only factor contributing to the outflows, according to Paul Cappelli, head of ETF strategies at Galaxy.

“The Canadian bitcoin ETF market is more mature than the U.S., so we are seeing investors managing their portfolios more tactically than the early growth seen in the U.S.,” Cappelli said. “So there may be profit taking and other factors playing a role in individual investors’ decisions.”

The US presidential election and resulting expectations of a friendlier regulatory environment for cryptocurrencies in the US were a slight bright spot for Canadian funds.

“Since the US elections about a month ago, appetite for Bitcoin has increased, and almost every measure from inflows to volumes and price has been higher,” Cappelli said.

With a smaller post-election increase than its US counterparts, these gains were not enough to reverse the five straight months of Canadian cryptocurrency ETF outflows that occurred after the US ETFs launched in January.

While this year’s net flows for Canadian Bitcoin ETFs will be negative, Rincon of TD sees more tailwinds on the way for the cryptocurrency ETF industry with changes coming in at the US Securities and Exchange Commission that could lead to more types of ETFs. Traded investment.

“I wouldn’t be surprised if there are more US registrations for other cryptocurrencies and some of them also move to Canada as well,” he said.