Canada’s pioneering role in launching the world’s first Bitcoin exchange-traded funds (ETFs) in February 2021 now faces mounting challenges as U.S. Bitcoin ETFs surge in popularity, drawing billions in investor inflows. The shift, driven by regulatory approvals south of the border, highlights a growing divide in the cryptocurrency investment landscape.
Bitcoin ETFs were initially a Canadian success story, attracting billions from domestic and international investors seeking exposure to the flagship cryptocurrency. However, the approval of U.S. Bitcoin ETFs earlier this year has led to significant capital outflows from Canadian funds. According to TD Securities, Canadian crypto ETFs have seen $578 million in net outflows as of Dec. 13, while U.S. Bitcoin ETFs recorded an extraordinary $36 billion in inflows by Dec. 16.
“Larger U.S. and international investors actually prefer now to use the U.S. ETFs because those are the markets where they predominantly trade all their other exposures,” said Vlad Tasevski of Purpose Investments Inc., the firm behind the world’s first Bitcoin ETF.
Canadian Market Faces Unique Challenges
Despite losing international investors, Canadian Bitcoin ETFs have maintained slight net inflows from domestic investors, who account for over 80% of the customer base for funds like the $830-million Purpose Bitcoin ETF. A weaker Canadian dollar and the ability to invest in Canadian-dollar-denominated and hedged ETFs have contributed to this retention.
“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,” said Andres Rincon of TD Securities.
However, Canadian ETFs face stiff competition from U.S. funds offering lower management fees. Fidelity Advantage Bitcoin ETF, Canada’s cheapest Bitcoin ETF, charges a 0.43% management fee, while many others exceed 1%. In contrast, the largest U.S. Bitcoin ETF, the iShares Bitcoin Trust ETF, offers a sponsorship fee of just 0.25%.
“The most important reason for Canadian investors to prefer U.S. spot Bitcoin and spot Ethereum ETFs in this case is really the fee and liquidity,” said Tiffany Zhang, an analyst at National Bank of Canada.
Evolving Markets and Investor Decisions
The maturity of Canada’s Bitcoin ETF market, compared to the early growth stages in the U.S., has also influenced investor behavior. Paul Cappelli of Galaxy Digital Holdings noted that Canadian investors are managing their portfolios more strategically, with factors like profit-taking playing a role in outflows.
“The Canadian Bitcoin ETF market is more mature than the U.S., so we’re seeing investors manage their portfolios more tactically,” Cappelli explained.
Despite a slight postelection boost tied to expectations of a more crypto-friendly U.S. regulatory environment, Canadian crypto ETFs have endured five consecutive months of outflows following the January launch of U.S. ETFs.
Looking ahead, changes at the U.S. Securities and Exchange Commission may usher in new types of cryptocurrency ETFs, potentially influencing both markets. “It wouldn’t surprise me if there’s more filings in the U.S. for other cryptocurrencies and some of those also moving to Canada,” Rincon said.
As the U.S. crypto market accelerates, Canada’s Bitcoin trailblazers face mounting pressure to adapt and compete in a rapidly evolving landscape.
