First North American Bitcoin ETFs Sizzle

After one week on the market, the first North American bitcoin ETF is off to a hot start. The Purpose Bitcoin ETF (BTCC), listed on the Toronto Stock Exchange, saw its assets rise to $455 million after its first six trading days.

That’s a stunning start for any ETF, let alone one listed in Canada, where, according to Bloomberg, assets under management across all ETFs total just $215 billion. By comparison, AUM in U.S.-listed ETFs total $5.8 trillion.

After picking up nearly half a billion dollars of cash in a week, it’s seemingly only a matter of time before BTCC crosses the $1 billion mark, though fresh competition may lengthen the amount of time it takes for the fund to reach that milestone (in the U.S., the SPDR Gold Trust (GLD) holds the long-standing record for gathering $1 billion—a mere three days after its launch).

The Evolve Bitcoin ETF (EBIT), also listed on the Toronto Stock Exchange, started trading just one day after BTCC. But that one-day difference put EBIT at a steep disadvantage. It’s picked up $40 million in five trading days—less than one-tenth the haul of BTCC.

That said, Evolve isn’t ready to give up the fight just yet. Three days after launching, EBIT’s expense ratio was slashed from 1% to 0.75%, making it 25 basis points cheaper than BTCC.

Investors will now have to weigh EBIT’s cheaper price tag against BTCC’s superior liquidity—and those two certainly won’t be the only options for crypto exposure; several more Canadian bitcoin ETFs are in the pipeline awaiting approval.

Meeting Strong Demand

As their impressive inflows indicate, the entry of BTCC and EBIT onto the market have helped meet the strong investor demand for a bitcoin ETF.

For years, investors have pined for bitcoin exposure wrapped in the familiar ETF structure, but in the United States, they’ve been thwarted by the Securities and Exchange Commission, which has blocked all potential cryptocurrency ETFs from listing on U.S. exchanges.

At the same time that the SEC blocked crypto products from the U.S. market due to concerns about market manipulation and risk to retail investors, nearly a dozen such ETPs launched in Europe.

Those products have done pretty well. The Bitcoin Tracker One (COINXBT) and the Bitcoin Tracker Euro (COINXBE), considered the first bitcoin funds to trade on a regulated exchange, have accumulated a combined $2.8 billion in assets since 2015.

Yet perhaps due to them being listed in Europe or due to them being ETN-like certificates, U.S. investors haven’t flocked to those products.

The aforementioned BTCC and EBIT trade much closer to home, making them more desirable for many U.S.-based investors. They also hold bitcoin itself in cold storage (offline to prevent hacking), which is another feature that may appeal to investors.

Not So Simple

Still, Canada isn’t the U.S. For Americans, trading an ETF listed in Canada isn’t as simple as trading domestically.

In fact, trading international securities isn’t even a default option for most retail brokerages, and often requires a special account. For institutions, it may be more trivial, but they too would likely prefer a U.S.-listed product.

You could say that trading a foreign-listed bitcoin ETF takes away some of the convenience of an ETF. And it’s that convenience that is a major selling point of a bitcoin ETF in the first place.

After all, investors could just go out and buy bitcoin itself through Coinbase or another crypto-focused platform.

But for many, they would rather get their exposure in the same place they buy and sell stocks, bonds and ETFs.

Convenience Trumps All

Evidence of this convenience factor can be found in the success of the Grayscale Bitcoin Trust (GBTC). Around since 2013, for many years, it was the only game in town for investors wanting exposure to bitcoin through their brokerage accounts.

GBTC trades over the counter, not on a U.S. exchange. And it’s not an ETF, but rather an open-ended trust with only periodic creations.

Yet for American investors, it’s nearly as easy to buy and sell GBTC as it is GLD. This convenience is the reason the former now has more than $30 billion in AUM, even though it’s traded at massive premiums to its net asset value for much of its life.

For all its faults, GBTC is simply the most convenient way to get exposure to bitcoin for many investors. The only thing that could outdo it is … well, an actual U.S.-listed bitcoin ETF.

Benefits Of An ETF

After building up its liquidity (which shouldn’t take long), such an ETF would be just as tradable as GBTC (if not more so, given it would trade on an exchange), while enjoying the benefits of the ETF creation/redemption mechanism that would keep the fund’s price close to its net asset value.

That feature is important, and protects investors from overpaying for a fund’s underlying assets. Investors in GBTC don’t have that benefit. In December, the trust traded with as much as a 40% premium; on Friday, it traded at a 3.8% discount to its net asset value (ETF competition having an impact?).

Investors in the product still did quite well, earning 40% from Dec. 21 through Feb. 26. But they sharply underperformed bitcoin itself, which doubled in the same time period.

A bitcoin ETF would have prevented that from happening. This brings us full circle to the Toronto-listed BTCC and EBIT. With these ETFs, investors now have the option of receiving all of the benefits of a bitcoin ETF, including one-for-one tracking.

But they just aren’t U.S.-listed ETFs.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2