Canadian exchange-traded fund providers have lost out on an opportunity to receive large inflows of cash from U.S. investors after American fund managers made a last-minute decision to not allocate part of their money to Canadian bitcoin funds.
After more than a decade, U.S. regulators have approved a batch of regulatory filings allowing U.S. investment companies to launch ETFs that invest in bitcoin futures. The country’s first fund – ProShares Bitcoin Strategy ETF – is set to begin trading on Tuesday on the New York Stock Exchange under the ticker BITO.
Unlike many of its Canadian counterparts, which invest in “physical” bitcoin, BITO will track the futures market of bitcoin. Futures are a type of derivative that allow investors to speculate on what a price of a financial asset will be at a later date.
While ProShares does not invest directly in bitcoin, the fund had originally filed a prospectus with regulators that said it may allocate up to 25 per cent of the fund’s assets to Canadian ETFs “that could provide exposure to the spot price of bitcoin.”
The investment prospectus cited Canadian ETFs such as the Purpose Bitcoin CAD ETF, CI Galaxy Bitcoin ETF and Evolve’s bitcoin ETF as examples of funds they may consider, as well as other Canadian pooled investment vehicles that provide exposure to the spot price of bitcoin, such as the Grayscale Bitcoin Trust.
Five other U.S. ETF providers also filed similar investment prospectuses stating they may allocate between 15 per cent to 25 per cent to Canadian funds, which would have provided a large inflow of new funds from U.S. investors.
But on Friday, all six of the U.S. providers pulled the references to Canadian funds from their filings without providing a reason.
“It looks like regulators may have asked them to keep those exemptions out before final approvals,” said Evolve ETFs chief executive officer Raj Lala, who launched one of Canada’s first bitcoin ETFs in February and another multi-cryptocurrency ETF last month that tracks both bitcoin and ether.
“We had heard some rumblings that the investment companies may have to remove it, and when we saw the final prospectus all of the companies did it at the same time.”
Approval to invest in Canadian cryptocurrency funds may still come down the pipeline for U.S. bitcoin ETFs, said Purpose Investments Inc. CEO Som Seif, who manages more than $1.7-billion in North America’s first bitcoin fund – Purpose Bitcoin ETF.
“I think the missed opportunity for us will only be for the short while, and over time the U.S. bitcoin providers will get the exemption they need so they can be as close to spot as possible,” Mr. Seif said in an interview.
The exemption to allow investment managers to allocate to Canadian bitcoin funds has already been approved by the U.S. Securities and Exchange Commission for other investment funds outside of the bitcoin futures, Mr. Seif added. For example, Amplify invests in the Purpose Bitcoin ETF in its Transformational Data Sharing ETF, a U.S. fund that invests in equity securities of companies involved in the development and utilization of blockchain technologies.
“It is only Day 1 for the U.S. bitcoin funds and I think the SEC is navigating it step by step,” he said.
Experts say it’s hard to know whether U.S. investors already holding Canadian bitcoin ETFs will jump ship and instead buy the U.S.-based bitcoin ETFs once they launch.
If they do, it could affect the assets and new inflows to the Canadian “physical” bitcoin ETFs, said Daniel Straus, director of ETFs and financial products research at National Bank Financial Inc.
However, many of the assets coming into the Canadian products have been from domestic retail investors, Mr. Straus said, and many would be unlikely to buy U.S. ETFs instead. He continues to caution retail clients to exercise “great prudence” around highly volatile and speculative assets such as cryptocurrencies.
“It’s unlikely that any of those investors would cross the border to invest in a slightly more complex futures-based product with all of the ‘roll yield’ slippages that could entail, but in the world of crypto anything is possible,” he said.
Bitcoin, a digital currency not backed by any country’s central bank, is known to be highly volatile, with price swings of more than 30 per cent in a day. Launched in 2009, the cryptocurrency spiked in popularity in 2017 after reaching US$20,000 before plummeting more than 85 per cent in 2018.
Over the past year, bitcoin has made a comeback and is now worth more than US$61,000.
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