Cryptocurrency ETFs (Exchange-Traded Funds) are a type of investment fund that is listed on a stock exchange and invests in crypto assets like Bitcoin, Ethereum, and Litecoin. Cryptocurrency ETFs have been gaining traction in Canada for being a low-risk way to get exposure to cryptocurrencies without having to worry about things like security and liquidity. Crypto ETFs also have the potential to be more cost-effective than buying cryptocurrencies outright. But many Canadians are hesitant to invest in cryptocurrency because they don't understand how it works. Let’s talk about crypto ETFs, what they are, how they work, and everything you need to know before you buy.
What’s an ETF?
Exchange-traded funds (ETFs) are versatile investment products. Initially, they were created as a low fee and easier to trade alternative to mutual funds. Since then, they have become more popular and growing much faster than mutual funds. ETFs have proven ideal for investors looking for exposure to a specific index, sector, or commodity. Now, several ETFs in the market allow investors to gain exposure to cryptocurrencies, mainly Bitcoin and Ethereum.
Buying cryptocurrencies directly vs investing in an ETF
You may have asked yourself this legitimate question: should I buy cryptocurrencies directly or invest in a cryptocurrency ETF? The quick answer is relatively straightforward. If you want to use your Bitcoin or Ethereum to purchase goods and services, you need to buy them directly using a cryptocurrency exchange platform. If, on the other hand, you would like to gain exposure to the potential growth in the cryptocurrency market, then an ETF is an excellent option
An ETF is simply a pool of funds dedicated to the fund’s stated objective, such as tracking a particular index like the Toronto Stock Exchange (TSX) for example. Like traditional ETFs, the funds invested in cryptocurrency ETFs are actual dollars invested in cryptocurrencies that only the manager can sell or buy. Investors are unit-holders, and the value of their unit is expressed in dollars when trading, and not in units of Bitcoin.
The pros of cryptocurrency ETFs
A cryptocurrency ETF is a basket of crypto stocks that would provide a lot of benefits to the average investor. It allows investors to invest in cryptocurrencies without actually having to buy them. In this section, we will have a look at the advantages and disadvantages of a cryptocurrency ETF.
Buying cryptocurrencies on your own is cumbersome. You have to create an account with a cryptocurrency exchange platform and set up your own digital wallet. The fact that the market is unregulated provides a ripe environment for bad actors. Scams and fraud in the crypto market have become quite common. So, securing your wallet and choosing the proper exchange is critical. You need to be tech-savvy. The jargon can be overwhelming and the entire process can be complicated and confusing for some.
It’s important to note that in case your wallet is stolen or lost, your cryptocurrencies are unrecoverable. This is because cryptocurrency transactions take place on a blockchain, which was specifically designed that way. The blockchain is an immutable, public record of transactions and balances that cannot be manipulated by any one individual. This means that when someone sends another person money via the blockchain, it cannot be reversed.
On the other hand, buying a crypto ETF is as easy as buying a regular stock using your brokerage account or a robo-advisor. It’s a hassle-free experience. The fund manager invests directly in cryptocurrencies and holds them in cold storage on your behalf. If you don't already have an online broker, you can use our free comparison tool to find one, and we also have a free robo-advisor comparison tool.
Cryptocurrency ETFs can be held within registered accounts such as Tax Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). So, you can shelter your Bitcoin gains and re-invest your tax savings. That could be one of the most compelling reasons to purchase a cryptocurrency ETF rather than purchasing crypto directly and storing it yourself.
If you purchase cryptocurrencies directly and manage them yourself, you will need to pay taxes. If you are a Canadian tax resident and have made capital gains from digital currency trading or other crypto activity, then it is mandatory for you to declare and pay taxes accordingly. You are responsible for keeping track of your cryptocurrency activity and accurately reporting that information to the Canada Revenue Agency (CRA).
Cryptocurrency ETFs, like traditional ETFs, are highly regulated and follow strict rules. The digital assets that are held within the ETF are secured in cold storage. This means keeping your coins offline in a hardware wallet or on an external drive disconnected from the internet so hackers can't get at it.
There are reputable companies, like Gemini, who themselves are subject to laws and regulations to prevent financial crimes. For example, Gemini offers cold storage for companies and financial institutions. Not only do they use state-of-the-art technology to secure crypto in their custody, but they also offer insurance to protect against theft, fraud, hacks, and human error.
The cons of cryptocurrency ETFs
The market for digital assets is still young and needs more time to grow and mature. The crypto market remains highly speculative and extremely volatile. Therefore, there are several disadvantages to cryptocurrency ETFs that people should be aware of when considering investing in one.
ETFs use the benefits of the creation and redemption processes offered by the exchange-traded fund structure to limit tracking error. This being said, cryptocurrencies are highly volatile and trade 24 hours per day. Though Crypto ETFs promise to mimic the performance of their underlying asset, there will always be some variance between the price movement of the net asset value per unit of the fund and the actual digital asset. That tracking error can cause unexpected losses, or gains for that matter.
Suppose you buy a cryptocurrency on a crypto exchange platform. You can sell and buy your cryptos at any time of the day. For ETFs, it's different. The crypto market never sleeps, but the stock market certainly does. The regular trading window on the TSX is much smaller. From 9:00 pm to 4:00 pm EST, to be exact.
With the current volatility in the cryptocurrency markets, it is not possible to trade cryptocurrency ETFs 24/7. Trading hours are limited which means that you have to be available during those hours. Nor can you act quickly to take advantage of, or protect your portfolio from, crypto market changes that happen outside regular stock market trading hours.
Cost: MER and bid-ask spread
ETFs are a practical and secure way to invest in cryptocurrencies. However, this comes at a price. First, the management expense ratio (MER) can be from 0.95% up to 1.5%. The management expense ratio is the aggregate of the management fee, operating expenses and other costs incurred by the fund. Second, the spread, the difference between the bid and ask price, can be high if the ETF is not liquid enough.
Cryptocurrency ETF fees are high because of the crypto market volatility. In the United States, the world’s largest economy, the Securities and Exchange Commission (SEC) only just recently approved a Bitcoin ETF. The SEC’s hesitance to approve a cryptocurrency ETF has delayed institutional money from entering the crypto market, something that's needed to significantly reduce the volatility.
The volatility of the underlying asset
As previously mentioned, cryptocurrencies are highly volatile whether held directly or through an ETF. A recent study by the National Bureau of Economic Research, the University of Cambridge, shows a few players still dominate the crypto market. Their research indicates that the top 1,000 investors control around 3 million Bitcoin and the top 10,000 investors own about 5 million. The study came to two conclusions:
- The increased adoption of bitcoin will be more profitable to early top investors than to the newcomers
- Bitcoin can be subject to market manipulation
Because the cryptocurrency market remains largely unregulated, there is quite a bit of market manipulation. A single tweet from Elon Musk can send the market into a frenzy, or tank the price of Bitcoin. Further to that, investors who hold large amounts of crypto, called whales, have been known to coordinate mass sell offs. A lot of times they buy back at a lower price, after smaller investors sold their holdings, often at a loss. That puts smaller investors, everyday people, at risk of losing their investments.
Cryptocurrency market trends
The cryptocurrency market is booming. There is heightened interest from both retail and institutional investors. Many milestones have been reached:
- For the first time, the cryptocurrency market exceeded 3 Trillion dollars in market cap. Making a lot of early investors quite wealthy;
- In the United States, the Securities and Exchange Commission has approved the first American Bitcoin ETF. It’s simply a sign that cryptos are here to stay. Large investment firms do not go through the hassle of obtaining approvals unless they are pretty confident digital assets have become part of the new ‘normal’.
Bitcoin and Ethereum continue to lead the market in terms of market value and, most importantly, technology. So far, ETFs in Canada allow investors to gain exposure to the two leading cryptos. However, there are crypto ETFs that include Litecoin (LTC), XRP (XRP), and other popular cryptocurrencies as well.
Bitcoin or Ethereum?
Bitcoin and Ethereum are very different and were actually created to serve different purposes. One is a decentralized platform that runs smart contracts, the other is just a cryptocurrency. Below are some key differences:
The supply of Bitcoin is capped at 21 million bitcoins. This feature makes Bitcoin appealing to some investors who perceive it as a store of value similar to gold. The supply of Ethereum, on the other hand, is unlimited.
Ethereum’s popularity as the second-largest cryptocurrency by market capitalization can be attributed to its technology. Ethereum operates as a decentralized network, and smart contracts are one of its most promising features. This new technology has the potential to revolutionize the financial industry. Smart contracts are pieces of code which can be written to automatically execute certain actions when specific conditions are met.
Ethereum is also less complex and does not require the energy-consuming mining process, which Bitcoin is known for. Consequently, it uses less energy and is more environmentally friendly. Ethereum is an open source project to build a decentralized world computer that would pay people with cryptocurrencies for work done on it.
Bitcoin is, without doubt, the most popular cryptocurrency nowadays. It’s widely perceived as the most attractive by large institutional investors. Bitcoin’s market cap now exceeds $1 trillion. Ethereum is the second-most valuable digital currency with a market value in the neighbourhood of $450 billion. Bitcoin is far more liquid than Ethereum, which could be because Bitcoin was introduced first and it had time to establish itself. However, Ethereum is growing much faster than Bitcoin and it is expected that it will eventually surpass Bitcoin's market cap due to its scalability and use cases.
Best crypto ETFs in Canada
All the funds below have less than one-year of historical performance. They are all passive investments. Meaning, the manager’s mandate is exclusively to track the price movement in US dollars of the digital asset. For the list of the best crypto ETFs in Canada, we will review the best:
- Bitcoin ETFs
- Ethereum ETFs
- Multi-cryptocurrency ETFs (New)
The best funds should offer high liquidity, low MER, and good tracking of Bitcoin prices. Since most of these funds have less than one year of existence, it's too early to judge their ability to track the prices of their underlying assets closely. Also, performance data is not available since all the funds below have less than one year of existence.
Best Bitcoin ETFs
Bitcoin is the grandfather of the cryptocurrency market. It is regarded as the best investment opportunity for those looking to invest in the crypto market. Below is a list of some of the best Bitcoin ETFs.
1. Purpose Bitcoin ETF
Purpose Bitcoin ETF or BTCC is one of the largest cryptocurrency ETFs in Canada. The fund has $1.8 Billion dollars in assets. So, it’s by far the fund that offers the best liquidity for Investors. You can choose from:
- BTCC-B: The most popular version and it trades in Canadian dollars and is non currency-hedged;
- BTCC-U: This fund trades in US dollars;
- BTCC: This fund Trades in Canadian dollars and is currency hedged.
The fund's historical performance is not available since it was created just a couple of months ago. The fund keeps 100% of its holding in cold storage; offline to protect the digital assets from being hacked. The management expense ratio (MER) is capped at 1.5%. BTCC funds can be held in both registered and unregistered accounts. It’s important to note; the fund invests solely in Bitcoin, making it a high-risk investment.
2. 3iQ CoinShares Bitcoin ETF
3iQ CoinShares Bitcoin ETF (BTCQ) is another popular Bitcoin ETF with over $1.5 billion dollars in assets under management. Its’ management expense ratio is lower than BTCC by 25 basis points at 1.25%. The fund is available to investors under:
- BTCQ: unhedged and trades in Canadian dollars
- BTCQ-U: trades in US dollars
BTCQ allows investors indirect exposure to the daily price movement of the US dollar price of Bitcoin. It’s considered a high risk investment. The fund can be held in both registered and unregistered accounts.
3. CI Galaxy Bitcoin ETF
CI Galaxy Bitcoin ETFs (BTCX) objective is to provide unitholders exposure to Bitcoin. The fund manages over $600 million dollars. BTCX is offered in two versions:
- BTCX-B: it trades in Canadian dollars and is non-currency-hedged;
- BTCX-U: This fund trades in US dollars.
The fund keeps 100% of its holding in cold storage, offline to better protect the digital assets from being hacked. The management expense ratio is capped at 0.95%. So, it’s ideal for investors looking to pay the lowest fees possible. BTCX can be held in both registered and non-registered accounts. BTCX is not diversified and invests solely in Bitcoin. Consequently, it’s ideal for investors with a high tolerance to risk.
4. Evolve Bitcoin ETF
Evolve Bitcoin ETF (EBIT) offers exposure to the world’s most popular cryptocurrency; Bitcoin. The fund was created on February 17th, 2021. At the writing of this post, the fund is managing a little bit over $200 million. This ETF trades under:
- EBIT-U: trades in US dollars
- EBIT: trades in CAD and is non hedged
EBIT can be held in both registered and non registered accounts. The management fee is at 0.75% plus applicable taxes. The management expense ratio was not yet estimated since the fund is still new. Similar to the other funds discussed, EBIT is also a high risk investment. Since EBIT is not a large fund, liquidity may be an issue. Less liquid ETFs tend to have a high trading spread; the difference between bid-ask prices.
Best Ethereum ETFs
Ethereum is a decentralized public blockchain that operates as a smart contract platform. It is also considered to be the world's second most popular cryptocurrency, after Bitcoin. Below are some of the best Ethereum ETFs.
1. Purpose Ethereum ETF
Purpose Ether ETF (ETHH) was the first physically settled Ethereum ETF in Canada. The fund allows investors to gain exposure to Ethereum. The management expense ratio is capped at 1.50%. The asset under management at the writing of this post was over $400 million dollars. The Ether assets of the fund are held in a secure offline wallet. ETHH can be held in both registered and unregistered accounts.
- ETHH-B: trades in Canadian dollars and is currency hedged
- ETHH-U: trades in US dollars
- ETHH: trades in Canadian dollars and is non hedged
2. CI Galaxy Ethereum
CI Galaxy Ethereum (ETHX) is an alternative to Purpose Ether ETF (ETHH). It has the same mandate with lower fees. The MER for ETHX is 0.95%, whereas ETHH is at 1.5%. The asset under management at the writing of this post was more than $1 billion. ETHX can be acquired within registered and non-registered accounts. The Ether is secured 100% in cold storage.
- ETHX-B: trades in Canadian dollars and is unhedged
- ETHX-U: trades in US dollars
3. Evolve Ether ETF
Evolve Ether ETF (ETHR) provides investors with exposure to the daily price movement of Ethereum. It’s a relatively small fund with a little bit over $100 million in assets under management. The management fee is 0.75%. The management expense ratio is not yet published for the fund.
- ETHR: trades in Canadian dollars and is non-currency hedged.
- ETHR-U: trades in US dollars
- ETH is a high-risk investment as it’s not diversified, and the underlying asset is highly volatile.
4. 3iQ CoinShares Ether ETF
3iQ CoinShares Ether ETF (ETHQ) has over $400 millions dollars in assets under management. The investment objective is to offer exposure to the digital currency Ether. The management expense ratio is capped at 1.25%.
- ETHQ: trades in CAD and is non hedged
- ETHQ-U: trades in US dollars
- ETHQ invests 100% of its assets in Ether and is considered a high risk investment. You can buy and hold
- ETHQ within registered and non registered accounts.
Best multi-cryptocurrency ETFs
Bitcoin and Ethereum are the two most popular cryptocurrencies. But they are not the only ones changing the future of finance. Below are some of the best multi-cryptocurrency ETFs.
1. Evolve Cryptocurrencies ETF
Evolve cryptocurrencies ETF or ETC is a newcomer and started trading on September 24th, 2021. It’s the first fund in Canada to invest in both Bitcoin and Ether based on market capitalization. It’s ideal for investors who want to make the jump into cryptocurrencies but aren’t sure which one to pick.
- ETC is RRSP and TFSA eligible. The fund is rebalanced monthly, and the asset under management is 38 million dollars as of November 15th. The portfolio allocation at the writing of this post was 67% Bitcoin and 33% Ethereum.
- ETC is offered in both Canadian unhedged (ETC.TO) and US dollars (EGC.U). The management fee is 0.75%; the Management Expense Ratio for the fund was not yet published.
- ETC offers better diversification than the other ETFs discussed in this post. However, it’s still considered a high risk investment.
How to buy cryptocurrencies directly
While cryptocurrency ETFs are a great way to invest in cryptocurrencies with less risk and more security, you may still want to hold some crypto for yourself. If you’d like to invest in cryptocurrencies directly, here are some of the most recommended ways:
Coinsmart is a legitimate company in Canada. It’s registered with the financial transaction and report analysis center of Canada (FINTRAC). Their platform offers competitive trading fees and 24/7 customer support.
Wealthsimple Crypto is another excellent option. Besides offering a wide variety of cryptos, there is no minimum balance required. Another advantage of Wealthsimple Crypto is its platform, as it's ideal for both beginners and experts.
MyBTC.ca is an excellent way to get your money into the crypto market, especially if you want to bypass the bank entirely. There are several way to fund your account, including with cash at your local Canada Post. Or with your gaming Flexepin vouchers.
Crypto.com is a popular exchange amongst crypto – enthusiasts. It offers many crypto coins to purchase. You can buy and sell crypto, actively trade, store, and use your crypto for purchases. They also offer other services like lending and bill payments.
NDAX is an easy-to-use, intuitive platform that offers something for everyone. New investors can get started quickly and easily. While veteran investors can access more advanced trading tools. They offer Over The Counter (OTC) trading services for those looking to invest large amounts.
BitBuy is a popular and safe exchange in Canada. They offer easy-to-use features for new investors, as well as more advanced features for more experienced traders. They offer relatively low trading fees.
VirgoCX is a reputable, compliant Canadian crypto exchange. They offer all the most popular cryptocurrencies. They also offer features like charts, technical analysis tools and NFTs, and their fees are competitive.