For investors looking to add cryptocurrency exposure to a portfolio, spot bitcoin exchange-traded funds can provide an effective and simple avenue. After falling out of favor with investors in recent years, these ETFs are seeing a resurgence, attracting strong inflows in 2024. While Canada-listed bitcoin and other crypto ETFs still represent a small portion of the broader market, their growing popularity signals renewed interest.
The shift is largely driven by the relentless surge in bitcoin’s price over the year, particularly after the crypto-friendly Donald Trump was reelected US president. The flagship cryptocurrency flirted with the USD 100,000 milestone for the past week. Spot bitcoin ETFs thus performed well and looked even more attractive.
The tailwind for the world’s biggest cryptocurrency began gathering in January when the US Securities & Exchange Commission greenlit the sale of US-domiciled spot bitcoin ETFs. The move generated excitement north of the border, even though Canada had a three-year head start in the bitcoin ETF market.
Canadians Have the Best of Domestic and US Bitcoin ETFs
Canadians have been investing in crypto ETFs (including bitcoin spot ETFs) for years. In February 2021, Canada became the first country to approve these funds. The Purpose Bitcoin ETF was the pioneer, followed quickly by the likes of the CI Galaxy Bitcoin ETF and Fidelity Advantage Bitcoin ETF. Today, Canadian investors have access to nearly three dozen crypto-themed ETFs, including ones tracking ethereum, the second-largest cryptocurrency.
Canadian cryptocurrency ETFs grew their assets under management from C$5.22 billion in September 2024 to C$5.68 billion in October—a notable 8.8% increase—fueled by renewed investor interest and confidence in digital currencies. With bitcoin nearing USD 100,000, bitcoin ETFs are expected to continue to see strong inflows. Bitcoin notched a record high of USD 99,605 on Nov. 22, marking a staggering 125.17% gain this year. Since the US presidential election, it has soared by approximately 44%.
Canadian investors looking to play the trend with ETFs have options beyond domestic names; they can also invest in more than 30 US-domiciled ETFs via their trading accounts. In the United States, spot bitcoin ETFs have rapidly become the fastest-growing ETF class ever. Their popularity has paved the way for ethereum-tracking ETFs in the US, further enriching options for Canadian investors.
Added Advantages for Canadian Investors
In Canada, bitcoin ETFs have the added benefit of being eligible for tax-advantaged accounts like RRSPs and TFSAs. They can grow and withdraw their bitcoin-related investments tax-free with TFSAs and in a tax-sheltered way with RRSPs. With RRSPs, investors can claim a tax deduction for contributing to the account and have their investments grow in a tax-deferred fashion. However, if that investment incurs a loss, you can’t claim it as a capital loss.
Canadians must also consider the impact of currency fluctuations when investing in unhedged products or US-dollar-denominated ETFs. A declining Canadian dollar can enhance returns on US-dollar-based investments when repatriated. Conversely, returns could shrink if the loonie strengthens against the greenback. Currency-hedged bitcoin ETFs can remove uncertainty related to exchange rate fluctuations.
ETFs vs. Spot ETFs
Bitcoin ETFs and bitcoin spot ETFs differ in their underlying assets and how they track bitcoin’s value. “A bitcoin spot ETF directly holds bitcoin in its portfolio,” explains Michael Zagari, investment advisor and associate portfolio manager at Wellington-Altus Private Wealth. “The value of the ETF moves in line with the current market price [the spot price] of bitcoin.” This direct exposure ensures a spot bitcoin ETF’s performance closely mirrors the digital currency’s price movements (minus management fees and associated costs). Investing in a spot ETF is akin to owning bitcoin itself.
Alternatively, synthetic bitcoin ETFs provide exposure through derivatives like futures contracts. These ETFs, which do not directly hold bitcoin, invest in bitcoin futures contracts—agreements to buy or sell the cryptocurrency at a predetermined price on a future date. Such a fund’s value “depends on the futures market rather than the spot price [of bitcoin],” explains Francis Sabourin, portfolio manager and investment advisor at Francis Sabourin Wealth Management, Richardson Wealth Limited.
Sabourin cautions that this can result in tracking discrepancies due to market phenomena like contango or backwardation. Contango occurs when futures contract prices rise above spot prices, while backwardation is when the opposite happens.
Covered call bitcoin ETFs offer another route. They “provide a balanced approach for bitcoin investors by combining the potential for capital appreciation with the benefit of yield generation,” says Zagari.
Canadian Cryptocurrency Regulation
Canada has proactively regulated cryptocurrencies, balancing fostering innovation and protecting investors. The regulatory framework is multifaceted, with key roles played by the Financial Transactions and Reports Analysis Centre of Canada and the Canadian Securities Administrators.
“Canada has issued guidelines for crypto asset trading, with the CSA focusing on platforms that facilitate cryptocurrency transactions, ensuring they comply with securities laws when necessary,” says Sabourin. The regulators periodically review crypto funds to ensure adequate liquidity, secure custody arrangements, and structural soundness, safeguarding investors while maintaining access to digital assets.
Canada’s regulatory landscape will likely evolve as cryptocurrency adoption broadens. “Proposed changes include stricter rules around custodianship and limits on which types of investment funds can hold crypto assets,” says Sabourin. “There are ongoing discussions about the need for specific regulations for stablecoins and other crypto assets outside of the traditional securities laws, signaling further refinements in the regulatory environment.” As oversight improves, it will foster greater confidence among investors in crypto and crypto-related assets, including ETFs.
The Inherent Risks of Cryptocurrency Investing
Despite its soaring popularity, bitcoin remains a highly volatile and speculative investment. Dan Kemp, chief research and investment officer at Morningstar, cautions against relying on short-term price surges. “The dramatic change in price underscores the difficulty of estimating the fair value of an asset that is primarily a vehicle for speculation,” Kemp says. Unlike traditional investments, such as stocks or bonds, which generate cash flows or interest, bitcoin’s valuation is far less tangible. “As an investor, it’s worth considering the value you would ascribe to an asset if you had to own it for an extended period without the option to sell,” Kemp advises.
ETFs are not immune from wild and unpredictable price movements—a core characteristic of cryptocurrency. “It is no different than any other new, innovative, and growing technology, so the path is typically volatile,” notes Zagari, adding that “anything can go wrong in the short term.” Further, the custodial safety of crypto assets is still a concern, especially when private keys are lost, stolen, or hacked. However, “this issue has been somewhat mitigated with the introduction of bitcoin ETFs, which allow investors to outsource custodial risks,” says Sabourin.
For these reasons, experts stress that investors should carefully calibrate their exposure to bitcoin, “Especially if they cannot afford to lose their capital or suffer significant losses,” Zagari says. Those seeking bitcoin exposure should be prepared to suffer significant losses and avoid making big bets in pursuit of overnight riches.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
