(Bloomberg) — In what has been a record year for Bitcoin, the creators of the world’s first exchange-traded fund to own the cryptocurrency appear to be at risk of falling behind.
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Bitcoin ETFs were launched in Canada in February 2021, making them the first in the world. This led to an influx of billions of dollars from Canadian and foreign investors seeking exposure to the native 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 net outflows this year through December 13. Bitcoin ETFs have seen record inflows of $36 billion through December 16. Bitcoin is up more than 150% this year.
Some U.S. investors who had invested in Canadian Bitcoin ETFs have now switched to U.S. ETFs, according to Vlad Tasevski, head of asset management at Purpose Investments Inc., which had the world’s first Bitcoin ETF.
“Larger U.S. and international investors now prefer to use U.S. ETFs because those are the markets where they primarily trade all of their other investments,” Tasevski said. “But that was to be expected because at the end of the day we know that the US is the largest global capital markets, where most of the liquidity is.”
While the Purpose Bitcoin ETF (ticker BTCC) has seen an outflow of international investors this year, Tasevski said there has been a slight net increase in flows from Canadian investors, who make up more than 80% of its customer base for the approximately C$830 million. fund.
For Canadian investors, the weaker Canadian dollar could help them maintain their investments in the country. Canadians prefer to invest with their local currencies and Canadian Bitcoin ETFs can be denominated in Canadian dollars and hedged, said 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,” Rincon said.
For investors making the switch to US Bitcoin ETFs, lower management fees are one of the potential benefits. 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 sponsor fee of 0.25%.
“The main reason for Canadian investors to prefer US spot Bitcoin and Ethereum ETFs in this case is actually compensation and liquidity,” said National Bank analyst Tiffany Zhang. “A small difference in the index you use as well as management fees will be the biggest drag on ETF returns.”
The timing of the launch of these ETFs contributed to the difference in management fees, Zhang said. When the Canadian Bitcoin ETFs launched in 2021, Bitcoin was a difficult asset class to enter, but because Bitcoin is now easier to access and there is much more competition, US-based ETFs launched earlier this year with lower management fees.
Some Canadian ETFs have since reduced their fees, but because US ETFs have higher trading volume, it is easier for the US ETFs to reduce costs.
While U.S. Bitcoin ETFs have had an impact on the Canadian market, they are not the only factor contributing to the outflows, said 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 manage their portfolios more tactically than the early growth we are seeing in the U.S.,” Cappelli said. “So there may be profit-taking and other factors that play a role in individual investors’ decisions.”
The US presidential election and resulting expectations of a friendlier regulatory environment for crypto in the US have been a small bright spot for Canadian funds.
“Since the US election almost a month ago, interest in Bitcoin has increased, and almost every metric, from flows to volumes to prices, has all been higher,” Cappelli said.
With a smaller post-election surge compared to their U.S. counterparts, these gains have not been enough to reverse the five straight months of outflows for Canadian crypto ETFs that occurred after the launch of U.S. ETFs in January.
While net inflows for Canadian Bitcoin ETFs will be negative this year, TD’s Rincon sees more tailwinds for the crypto ETF industry with upcoming changes at the U.S. Securities and Exchange Commission that could lead to more types of ETFs.
“I wouldn’t be surprised if there are more sign-ups in the US for other cryptocurrencies and some of them move to Canada as well,” he said.
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