This year has come to be known as a landmark for Bitcoin, yet the individuals behind the world’s first Bitcoin Exchange-Traded Fund (ETF) based in Canada are finding themselves at risk of lagging behind. The surge in this cryptocurrency’s popularity left investors with an important decision to make, particularly in light of recent developments across the border in the United States.

The journey began in February 2021 when Canada launched its Bitcoin ETF, marking a significant milestone as it was the first of its kind globally. With the ability to attract billions in investment from both domestic and international investors eager to stake their claim in this novel digital currency, the ETF quickly gained traction. However, the approval of a Bitcoin ETF in the U.S. earlier this year prompted a shift in the landscape, causing some investors to rethink their positions in the Canadian offerings.

Data compiled by TD Securities paints a telling picture: as of December 13, 2021, Canadian Bitcoin ETFs had experienced a net outflow totaling around CAD 578 million (approximately USD 405 million). This stark figure identifies the cryptocurrency ETF segment as the only category within Canada to face outflows this year, in sharp contrast to the U.S., where Bitcoin ETFs enjoyed an influx nearing a record USD 36 billion as of December 16. The price of Bitcoin soared more than 150% over the year, attracting a diverse pool of investors.

Vlad Tasevski, the Asset Management Head of Purpose Investments Inc., the company behind the very first Bitcoin ETF, explained how some U.S. investors who initially favored Canadian ETFs have diverted their attention to the American variant. Tasevski articulated, “American and international institutional investors now actively prefer utilizing U.S.-based ETFs because those markets represent where they conduct most of their other risk exposures.” There is also an underlying element of predictability to this shift, as the U.S. is recognized as the world's largest capital market, presenting a greater degree of liquidity.

Despite this backdrop of outflows, Tasevski noted a slight uptick in net inflows from Canadian investors into the Purpose Bitcoin ETF, predominantly driven by the Canadian clientele that constitutes over 80% of the fund's CAD 830 million asset base. For Canadian investors, the weakening of the Canadian dollar may serve as a motivating factor to retain their investments domestically. Andres Rincon, the Head of ETF Sales and Strategy at TD Securities, highlighted a preference among Canadians to invest using their local currency, which the Canadian Bitcoin ETF facilitates as it’s denominated in CAD and offers hedging options.

“The Canadian ETF genuinely provides you with a unique option for managing currency risk over the long term, something that is intrinsic to Canadian ETFs,” remarked Rincon. Meanwhile, for investors who shifted to U.S.-based Bitcoin ETFs, one prominent appeal has been the lower management fees associated with these products. Fidelity's Bitcoin ETF boasts a competitive management fee of just 0.43%, while many other Canadian ETFs are priced above 1%. The largest Bitcoin ETF in the U.S., the iShares Bitcoin Trust ETF, comes with an even lower rate at 0.25%.

According to Tiffany Zhang, an analyst at National Bank, the primary drivers for Canadian investors’ preference for U.S. spot Bitcoin and Ethereum ETFs are indeed fees and liquidity. She stated, “The subtle nuances of the indices employed as well as management fees can become the largest drag on ETF returns.” A crucial factor contributing to the variance in management fees is their respective launch timing; when Canadian Bitcoin ETFs debuted in 2021, Bitcoin was an asset class difficult to acquire. Today, with heightened availability and intensified competition, U.S. ETFs have entered the market with markedly lower management fees.

While some Canadian ETFs have responded by reducing their fees, the substantial trading volume in the U.S. market has enabled these ETFs to maintain lower costs more readily.

Paul Cappelli, Head of ETF Strategies at Galaxy, asserted that while the introduction of U.S. Bitcoin ETFs has affected the Canadian market, they are not the sole catalyst for the observed outflows. “The Canadian Bitcoin ETF market has matured more than its U.S. counterpart, enabling investors to adopt a more strategic approach than what we observed in the early growth of the U.S. market,” Cappelli noted. The factors leading to profit-taking and other personal investor decisions play a role here.

Adding a silver lining to the situation, the Canadian crypto funds find hope in the expectation for a more favorable regulatory environment toward cryptocurrencies in the U.S. Despite this, the growth seen by Canadian cryptocurrency ETFs remains minor compared with the U.S. counterparts, and the outlook has not sufficed to reverse the continuous outflow that Canadian crypto ETFs faced since the launch of the U.S. ETFs in January.

Rincon remains optimistic, noting that while 2021 will leave Canadian Bitcoin ETFs with negative net flows, the forthcoming reforms anticipated from the U.S. Securities and Exchange Commission hold the potential to positively impact the cryptocurrency ETF landscape. “If there are more crypto applications in the U.S., and some of those migrate to Canada, I wouldn’t be surprised,” he editorialized.