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Posted on Jan 11th, 2024

Ahead of the Curve: Canada’s Venture into Spot Bitcoin ETFs and the Path Forward for the US

In the constantly changing world of cryptocurrency investing, spot Bitcoin exchange-traded funds (ETFs) have emerged as a significant breakthrough, providing investors with exposure to Bitcoin without the complexities of direct ownership. Canada has been at the forefront of this wave, launching the world’s first spot Bitcoin ETFs. With US regulators having now greenlit spot bitcoin ETFs, we can look to Canada to see what we can expect for US markets. Below, we’ll discuss the Canadian experience with spot Bitcoin ETFs and delve into key learnings that can be applied to the US market.  

Key Takeaways: 

  • Canada’s success with spot Bitcoin ETFs has underscored the importance of a proactive regulatory framework that encourages innovation while ensuring robust investor protection.  
  • The enthusiastic reception of Bitcoin ETFs in Canada provides a snapshot of potential market dynamics in the US, including investor demand and the influence on Bitcoin’s liquidity and price stability. 
  • Canada’s rigorous investor protection measures are a blueprint for the US to emulate, ensuring that the potential benefits of Bitcoin ETFs do not come at the expense of security and trust. 
  • The strategic implications for the US are profound, as Canada’s experience hints at how spot Bitcoin ETFs might reshape investment patterns and enhance the integration of cryptocurrencies into the traditional financial system. 

The Canadian Experience 

Investor demand 

Canada’s pioneering journey into spot Bitcoin ETFs began in earnest with the launch of the Purpose Bitcoin ETF in February 2021. From the very beginning, the Canadian market’s response to the launch of these spot Bitcoin funds signalled a robust appetite for these types of products from investors. Canadian Bitcoin funds now hold approximately $2 billion in AUM in a total ETF market valued at around $376 billion – not an insignificant amount when you consider this asset class came into existence a decade and a half ago, and investors were only exposed to this type of ETF a little over two and a half years ago. This amounts to around .5% of the total AUM being invested in bitcoin ETFs. 

If the same .5% demand was met in the $7 trillion US ETF market, we would see $35 billion of inflows into US spot bitcoin funds.  

Regulatory landscape and investor protection

The regulatory environment in Canada, led by the Ontario Securities Commission (OSC), has proven to be adaptive to the burgeoning crypto-asset class. The OSC worked closely with fund managers to ensure these products provided adequate investor protections, including stringent custody rules to safeguard the Bitcoin holdings. 

Unlike in the US, where the SEC’s blocking of Bitcoin fund approval has been labelled “arbitrary and capricious” by a US court, the OSC has made it clear through its words and actions that its role as a regulator is not to make judgments on the merits of an investment. Rather, their mandate is to give investors access to new and innovative asset classes or investment opportunities in a way that offers proper regulatory oversight and maximizes consumer protection. And we have seen how this approach has played out in Canadian markets during a tumultuous 2022, where Bitcoin tumbled from its November 2021 highs. 

As investors sold off units of Canadian spot bitcoin ETFs to cut losses and de-risk their portfolios, there was no fund provider that could not meet its redemption requirements. A testament to the importance of properly-regulated investment vehicles that have stringent liquidity and safety requirements. 

Canada’s experience demonstrates that a well-regulated market can offer spot bitcoin ETFs without compromising investor safeguards. Measures such as rigorous auditing, transparent pricing mechanisms, and secure custody solutions have instilled investor confidence while proving the importance of having forward-thinking and adaptive regulators. 
With US spot funds now available, fully regulated by the SEC, and run by some of the world’s most prominent asset managers, US investors stand to benefit just as Canadians have from more accessible, trustworthy, and liquid Bitcoin exposure. 

The introduction of spot Bitcoin ETFs in Canada has had a discernible impact on the market. They have provided a regulated and straightforward avenue for institutional and retail investors to partake in the crypto economy. Moreover, these products have served as a litmus test for the acceptance and viability of cryptocurrency-based financial instruments. 

For the US market, which is significantly larger and more important internationally, introducing spot Bitcoin ETFs could lead to a substantial shift in investment strategies and market dynamics, not just in North America but the world.  

Looking Forward 

Canada’s pioneering role in establishing spot Bitcoin ETFs has set a benchmark for the US market. The prudent observer would do well to consider these lessons in anticipation of the transformative potential these funds could unlock in the larger and more complex US market. 

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This information is provided for illustrative and discussion purposes only. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. Historical trends do not imply, forecast or guarantee future results. Information is as of the date indicated and subject to change without notice. Nothing herein constitutes a prediction or projection of future events or future market behaviour.