Bitcoin Rally Outpaces World's First Crypto ETF

(Bloomberg) -- In a record-setting year for bitcoin, the world's first exchange-traded fund founders appear to be at risk of being left behind.

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A Bitcoin ETF was launched in Canada in February 2021, a world first. This led to an influx of billions of dollars from Canadian and foreign investors who wanted to explore the first digital currency. But when the US Bitcoin ETF was approved earlier this year, some investors began reconsidering their investments in Canadian crypto.

Canadian Bitcoin ETFs saw net outflows of C$578 million ($405 million) through Dec. 13 this year, according to data compiled by TD Securities Inc. Crypto ETFs are the only ETF category to see outflows in Canada this year, while the U.S. As of December 16, Bitcoin ETF revenues have reached a record $36 billion. Bitcoin is up more than 150% this year.

Some American investors who were investing in Canadian Bitcoin ETFs have now switched to US-based investments, said Vlad Tasewski, head of asset management at Purpose Investments Inc., the world's first Bitcoin ETF.

"Large U.S. and international investors now prefer to use U.S. ETFs because those are the markets where they trade all their other exposure," Tasewski said. "But that was expected, because at the end of the day, we know the US is the biggest stock market in the world, and that's where most of the liquidity is."

While the targeted Bitcoin ETF (ticker BTCC) has seen outflows from international investors this year, Tasewski said flows from Canadian investors have grown slightly, making up more than 80 percent of the client base at C$830 million. Fund.

For Canadian investors, the weak Canadian dollar may affect their ability to 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, said Andres Rincon, head of ETF sales and strategy at TD Securities.

"What Canadian ETFs give you are options to manage your currency exposure over the long term, which is really unique to Canadian exposure," Rincon said.

One of the potential benefits for investors looking to switch to US Bitcoin ETFs is lower management fees. Fidelity Advantage Bitcoin ETF has the lowest management expense ratio of any Canadian Bitcoin ETF at 0.43%, while many others have ratios above 1%. The largest U.S. Bitcoin ETF, the iShares Bitcoin Trust ETF has a sponsor fee of 0.25%.

"The most important reasons Canadian investors would prefer to find US Bitcoin and Ethereum ETFs in this case is really fees and liquidity," said National Bank analyst Tiffany Jean. "Slight differences in the index you use, plus management fees, can be the biggest drag on ETF returns."

The timing of the launch of these ETFs contributed to the difference in management costs, Zhang said. Canadian Bitcoin ETFs Launched in 2021 While it was difficult for bitcoin to enter the asset class, the U.S.-based ETF was launched earlier this year with lower management fees as bitcoin has become easier to use and there is more competition.

Some Canadian ETFs have since lowered their fees, but U.S. ETFs have more trading volume, making it easier for Americans to keep costs down.

While U.S. Bitcoin ETFs have impacted the Canadian market, they are not the only factor driving the outflows, said Paul Cappelli, head of ETF strategy at Galaxy.

"Because the Canadian Bitcoin ETF market is more mature than the US, we see investors managing their portfolios more tactically than the initial boom seen in the US," Cappelli said. "Therefore, there may be other factors influencing the decisions of individual investors."

The U.S. presidential election and the resulting expectation of a regulatory environment for cryptocurrencies in the U.S. was a bit of a bright spot for Canadian funds.

"Since the US election nearly a month ago, appetite for bitcoin has increased, and virtually every metric, from flow to volume to price, has been higher," Capelli said.

Despite smaller gains compared to the U.S. since the election, those gains weren't enough to reverse a five-month streak of Canadian crypto ETFs that followed the launch of U.S. ETFs in January.

Canadian Bitcoin ETF net flows this year will be negative, but TD's Rincon believes changes coming to the U.S. Securities and Exchange Commission could lead to more ETFs on the way for the crypto ETF industry.

"It wouldn't surprise me if there are more filings for other cryptocurrencies in the U.S. and some moving to Canada," he said.

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