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Bitcoin Rally Leaves the World’s Original Crypto ETFs Behind

December 17, 2024

(Bloomberg) — In what’s been a record-breaking year for Bitcoin, the originators of the world’s first exchange-traded funds to hold the cryptocurrency appear to be at risk of being left behind.

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Bitcoin ETFs were launched in Canada in February 2021, making them the first in the world. This led to billions of dollars of 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 Canadian crypto investments.

Canadian Bitcoin ETFs have seen C$578 million ($405 million) in net outflows so far this year through Dec. 13, according to data compiled by TD Securities Inc. Crypto ETFs are the only ETF category in Canada to see outflows this year, while US Bitcoin ETFs have seen a record $36 billion in inflows through Dec. 16. Bitcoin has surged more than 150% this year.

Some American investors who had invested in Canadian Bitcoin ETFs have now switched to US-based ones, according to Vlad Tasevski, head of asset management at Purpose Investments Inc., which had the world’s first Bitcoin ETF.

“Larger US and international investors who actually prefer now to use the US ETFs because those are the markets where they predominantly trade all their other exposures,” Tasevski said. “But that would’ve been expected because in the end we know that the US are the biggest global capital markets, that’s where most of the liquidity is.”

While the Purpose Bitcoin ETF (ticker BTCC) has seen outflows from international investors this year, Tasevski said that there has been a slight net increase in flows from Canadian investors, who make up over 80% of the customer base for the roughly C$830 million fund.

For Canadian investors, the weaker Canadian dollar may be contributing to them keeping their investments in the country. Canadians prefer to invest with 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 really the Canadian ETFs give you is options to manage your currency risks over the long term, and that’s something that is really unique to the Canadian ones,” Rincon said.

For investors who are making the switch to US Bitcoin ETFs, one of the potential benefits is the lower management fees. The Fidelity Advantage Bitcoin ETF has the lowest management expense ratio of Canadian Bitcoin ETFs at 0.43%, while many others have ratios above 1%. The iShares Bitcoin Trust ETF, the largest Bitcoin ETF in the US, has a sponsorship fee of 0.25%.

“The most important reason for Canadian investors to prefer US spot Bitcoin and spot Ethereum ETFs in this case is really the fee and liquidity,” National Bank analyst Tiffany Zhang said. “Slight difference in the index that you use and also the management fee will be the biggest drag of ETF return.”

The timing of when these ETFs launched contributed to the difference in management expenses, Zhang said. When Canadian Bitcoin ETFs launched in 2021, Bitcoin was a hard to access asset class, but since Bitcoin is now easier to get exposure to and there’s much more competition, US-based ETFs launched earlier this year with lower management fees.

Some Canadian ETFs have lowered their fees since, but with US ETFs having larger trading volume, it is easier for the American ones to bring costs down.

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

“The Canadian Bitcoin ETF market is more mature than the US, so we’re seeing investors manage their portfolios more tactically than the early growth we’re seeing in US,” Cappelli said. “So there may be profit taking and other factors playing into individual investors’ decisions.”

The US presidential election and the resulting expectations of a more friendly regulatory environment for crypto in the US have been a slight bright spot for Canadian funds.

“Since the US election nearly a month ago appetite for Bitcoin has increased, nearly every metric from flows to volumes and price have all been higher,” Cappelli said.

With a smaller post-election boost compared to their US counterparts, these gains haven’t been enough to reverse the five straight months of outflows for Canadian crypto ETFs that occurred after 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 crypto ETF industry with incoming changes at the US Securities and Exchange Commission that could lead to more types of ETFs.

“It wouldn’t surprise me if there’s more filings in the US for other cryptocurrencies and some of those also moving to Canada too,” he said.