Throughout this remarkable year for Bitcoin, the funds that pioneered exchange-traded Bitcoin on a global scale are facing a new challenge.
Initially, Canadian Bitcoin ETFs, launched back in February 2021, led the charge as the first of their kind in the world. They attracted a substantial amount of investment, not only from Canada but also from abroad, luring investors eager for a piece of the cryptocurrency pie. However, the approval of Bitcoin ETFs in the U.S. earlier in the year sparked a shift in investor sentiment, causing some to rethink their Canadian crypto portfolios.
Figures from TD Securities Inc. report that Canadian Bitcoin ETFs have collectively experienced net withdrawals of C$578 million (or $405 million) this year up until December 13. This stands in contrast to U.S. Bitcoin ETFs which have recorded an outstanding $36 billion in inflows by December 16. It’s no surprise given Bitcoin’s impressive 150% leap in value over the year.
A number of American investors, once committed to Canadian Bitcoin ETFs, are now shifting their allegiance to those based in the U.S., as pointed out by Vlad Tasevski, leader in asset management at Purpose Investments Inc., known for initiating the first Bitcoin ETF in the world.
“Most American and international investors lean towards U.S. ETFs now, simply because it aligns better with where they predominantly manage all their trading activities,” Vlad highlights. “It’s expected, given that the U.S. holds the largest and most liquid capital markets worldwide.”
Despite seeing withdrawals from overseas investors, Tasevski notes that the Purpose Bitcoin ETF (ticker BTCC) is still gaining slight inflows from its Canadian clientele, who make up more than 80% of its C$830 million holdings.
For investors based in Canada, the fluctuating strength of the Canadian dollar is one factor encouraging them to maintain their investments locally. Canadians are generally more comfortable investing in their national currency and prefer ETFs that are denominated in Canadian dollars, offering hedging options, says Andres Rincon of TD Securities.
“The Canadian ETFs have a unique advantage: the ability to manage currency risks over the long haul, which stands out compared to others,” Rincon explains.
In contrast, those making the transition to U.S. Bitcoin ETFs might be attracted by the lower fees. The Fidelity Advantage Bitcoin ETF, for instance, sports the most competitive management expense ratio among Canadian Bitcoin ETFs at 0.43%, whereas many others surpass the 1% mark. Meanwhile, the iShares Bitcoin Trust ETF, the largest in the U.S., charges a sponsorship fee of only 0.25%.
According to National Bank analyst Tiffany Zhang, low fees and higher liquidity often persuade Canadian investors to opt for U.S. spot Bitcoin and Ethereum ETFs. “It’s the slight differences in indices and the varying management fees that can significantly influence ETF returns,” she comments.
Zhang further points out that the timing of the ETF launches played a crucial role in the expense disparities. When Canadian Bitcoin ETFs were introduced in 2021, accessing Bitcoin was quite a hurdle. Now, with easier access and heightened competition, U.S. ETFs can afford to offer lower management costs.
Although some Canadian ETFs have since adjusted their fees, the higher trading volumes in U.S. ETFs still allow them to keep costs down more effectively. The northward movement of U.S. Bitcoin ETFs hasn’t solely triggered Canadian outflows, according to Paul Cappelli of Galaxy’s ETF strategies.
“The market for Canadian Bitcoin ETFs is more advanced compared to the U.S., leading to more strategic portfolio management, unlike the initial growth phase we’re witnessing in the States,” Cappelli remarks. “There’s also the matter of profit-taking and other individual investor decisions.”
Interestingly, recent political developments in the U.S., namely the presidential election, have fostered expectations of a more crypto-friendly regulatory climate, offering a glimmer of hope for Canadian funds.
“In the wake of the U.S. election, interest in Bitcoin has surged, with metrics from flows to price seeing an uptick,” Cappelli highlights.
Despite the post-election bump, Canadian crypto ETFs have struggled to overturn the tide of five consecutive months of outflows since U.S. ETFs hit the market in January.
And though 2023 will likely close with a net negative for Canadian Bitcoin ETFs, Andres Rincon of TD Securities remains optimistic about the future, with anticipated SEC changes in the U.S. potentially paving the way for a broader range of ETF products.
“It’s plausible we’ll see a slew of new filings in the U.S. for other cryptocurrencies, which may eventually make their way to Canada,” he predicts.
