Top Canadian Bitcoin ETFs

When it comes to buying cryptocurrencies like Bitcoin, Canadian investors usually resort to cryptocurrency exchanges. From there, investors can either hold Bitcoin online in their “hot wallet” for easy access or transfer it offline to a “cold wallet” for greater security.¹

However, this approach cannot be implemented in a TFSA or RRSP as Bitcoin is not considered a “qualified investment” when it comes to the Income Tax Act.² A potential way to get around this constraint and the need for self-custody of Bitcoin is via a Bitcoin exchange-traded fund (ETF).

Bitcoin ETFs are a relatively new type of investment product that debuted in Canada in 2021. These crypto funds provide investors with exposure to Bitcoin while ensuring a high degree of transparency and liquidity via the ETF structure. Here’s all you need to know before you buy your first Bitcoin ETF.

What is a Bitcoin ETF?

A Bitcoin ETF works the same as any other ETF, by holding an underlying portfolio of assets in its basket and creating shares which trade on stock exchanges under their own ticker symbol. Unlike Bitcoin, Bitcoin ETFs can be bought and sold via most brokerages.

How does buying a Bitcoin ETF work?

When you buy shares of a Bitcoin ETF, the ETF provider will use your investment to purchase Bitcoin from a cryptocurrency market maker. From there, the ETF provider will store that Bitcoin in secure, offline cold storage to keep it safe.

The Bitcoin ETF shares you purchase will represent holdings in a specific amount of Bitcoin. Thus, when the price of Bitcoin moves, the price of your Bitcoin ETF shares will as well. Over time, this will help the Bitcoin ETF track the returns of Bitcoin, minus any fees.

Unlike Bitcoin, Bitcoin ETFs will charge ongoing fees, which include management fees, administrative, operational, and marketing expenses. Together, these comprise the ETF’s management expense ratio, or MER. The MER is an annual percentage fee deducted from your investment. For example, investing $10,000 in a Bitcoin ETF with a 1.00% MER would result in around $100 in annual fees.

Finally, Bitcoin ETFs can come in currency hedged or unhedged versions. Because the price of Bitcoin is tracked in U.S. dollars (USD) but Bitcoin ETFs trade in Canadian dollars (CAD), fluctuations in the USD/CAD exchange rate can add additional volatility.

Currency unhedged Bitcoin ETFs accept this. When the USD performs well, they gain extra value. When the CAD performs well, they lose extra value. Currency hedged ETFs attempt to mitigate this by using forward derivatives.

Top Canadian Bitcoin ETFs

The following Bitcoin ETFs are listed on Canadian exchanges and have some of the highest assets under management, or AUM.

Purpose Bitcoin ETF (TSX:BTCC)

BTCC was the first Bitcoin ETF launched in the world and is one of the most popular. The ETF holds actual Bitcoin in offline cold storage with its cryptocurrency custodian Gemini Trust Company and is currency hedged. BTCC also comes in currency unhedged (BTCC.B), U.S. dollar (BTCC.U), and carbon offset (BTCC.J) versions.

3iQ CoinShares Bitcoin ETF (TSX:BTCQ)

BTCQ tracks the daily price of Bitcoin in U.S. dollars via actual Bitcoin held in trust with custodian Tetra Trust Company, with Coinbase Custody Trust Company, LLC acting as a sub-custodian. The ETF is managed by 3iQ and CoinShares, which are large digital asset fund managers in Canada and Europe, respectively. The ETF also comes in a USD-denominated version (BTCQ.U).

CI Galaxy Bitcoin ETF (TSX:BTCX.B)

One of the lowest-priced Bitcoin ETFs on the Canadian market today is BTCX.B. Otherwise, the ETF functions similar to the previous options by holding actual Bitcoin in offline cold storage with its custodian. This ETF is offered by CI, but staffed with a management team from Galaxy Digital Capital Management LP, one of Canada’s larger digital asset managers. The ETF also comes in a USD-denominated version (BTCX.U).

How to buy Bitcoin ETFs in Canada

The process of how to buy Bitcoin ETFs mirrors the steps outlined in our guide on how to buy ETFs in Canada, but with a few additional considerations to keep in mind:

• Exotic ETFs: Some Bitcoin ETFs use derivatives to gain enhanced exposure. These include covered call Bitcoin ETFs, which deliver high yields; and inverse Bitcoin ETFs, which provide the daily opposite return of Bitcoin. These ETFs can be quite complex and risky, so ensure you do your research before buying one.
• 24/7 Trading: Unlike actual Bitcoin, Bitcoin ETFs do not trade 24/7.³ They are limited to regular stock exchange hours. A large after-hours or weekend movement in Bitcoin can cause Bitcoin ETFs to experience high volatility at market open or close, so it’s best to avoid trading at those times.
• Volatility: Because Bitcoin prices can fluctuate suddenly and dramatically, Bitcoin ETF prices can as well. Therefore, investors should avoid using market orders and instead place limit orders to avoid locking in a poor unanticipated sell or buy price.
• Redemption: Most Bitcoin ETFs cannot be redeemed for actual Bitcoin. They can only be sold on their own for a capital gain or loss.

Are cryptocurrency ETFs a good investment?

Bitcoin ETFs are a risky and speculative investment. Historically, they have been capable of strong gains, but also deep losses. This is because the underlying Bitcoin is highly volatile. Investors who buy Bitcoin ETFs must deal with not only market risk, but also the risk that specific technological or regulatory developments will negatively impact Bitcoin.

In addition, the MERs charged by these ETFs tend to be many magnitudes higher than regular index ETFs. Over time, the high fees can compound and eat into long-term returns. In contrast, holding Bitcoin in a hot or cold wallet does not incur fees outside of trading commissions and bid-ask spreads. In addition, a Bitcoin ETF does not provide true ownership of the underlying Bitcoin⁴.

However, if you aren’t comfortable with self-custody of Bitcoin or want to hold it in a tax-advantaged account, then a Bitcoin ETF could be a viable alternative to actual Bitcoin. These ETFs are transparent and tightly regulated, publish their holdings frequently, and are subject to strict reporting requirements. If you have a high-risk tolerance and don’t mind a speculative asset, then a Bitcoin ETF might be right for you.