The Purpose Bitcoin exchange-traded fund (ETF) that launched on the Toronto Stock Exchange in mid-February has set off a chain reaction of competitors following suit. Funds once able to charge healthy premiums of 30 per cent or more than the price of Bitcoin itself are having to rethink their approach, with the largest—Grayscale Bitcoin Trust (GBTC)—announcing this week that it also plans to convert to an ETF. 

GBTC’s move follows those of Canada’s Ninepoint Partners and CI, which announced plans to convert their Bitcoin funds to ETFs shortly after Purpose’s product started trading. The short-term success of Canada’s ETFs has many predicting the demise of closed-end funds like the one offered by New York-based Grayscale with US$38 billion in assets under management, which subjected investors to extended lockup periods, high fees and restrictions on who can get in. And it’s given observers––who’ve watched the Securities and Exchange Commission reject digital currencies for years––hope that a similar product might finally be approved in the U.S.

Som Seif, chief executive of Purpose Investments, said he doesn’t mind seeing others benefit from the hard work he put in.

“If you’re working with a novel product, like Bitcoin, there’s a lot of wood to chop in terms of the amount of work to be done to make sure everyone gets comfortable,” Seif said. “We did a lot of that wood chopping.”

Bitcoin ETFs have been hotly anticipated by the cryptocurrency industry because they remove many of the barriers to entry, allowing investors to easily buy and sell shares through traditional brokerage accounts and add them to retirement portfolios. Closed-end cryptocurrency funds are less flexible and aren’t always eligible for RRSPs and TFSAs, although The Bitcoin Fund from Canadian digital-asset fund manager 3iQ is.

SEC commissioner Hester Peirce is anxious to start the process of bringing a Bitcoin exchange-traded product to the U.S. The SEC has some high-profile applications, including one affiliated with investment giant Fidelity, currently under consideration.

Peirce, who is affectionately known as “Crypto Mom” for her dissenting opinions of SEC rejections of Bitcoin ETFs, said she thinks Canada’s experience could serve as a model for her peers on the commission.

“Seeing what Canada is doing and watching the market reaction, and seeing how well the mechanisms work can be helpful to inform us as we move forward,” Peirce said. “While it’s probably not a direct, ‘Oh, well, Canada did it; we have to do it too,’ it’s more of a, “Canada did it? And hey, it’s working. And so maybe it would work here, as well.’”

While the SEC has dismissed Bitcoin ETF applications in the past over concerns of potential market manipulation and illicit activities, Peirce said she would rather investors had access to a regulated vehicle with oversight.

“I’m not going to advocate one way or the other on whether people should invest in a product like this,” she said. “But there’s a lot of interest in getting exposure in your portfolio to this asset class. So why not provide people a mechanism that they’re comfortable with, that they know how it works?”

Peirce said Canada’s Bitcoin ETFs demonstrate two important points: there’s a large market for them, and it matters who gets approved to go first. A month and a half after launch, the Purpose Bitcoin ETF leads the pack by far in terms of assets under management, with $1.24 billion, compared to $99 million held by competitor Evolve and $69.2 million held by the CI Galaxy Bitcoin ETF, as of publication time.

“It’s a race to be first, as far as who’s going to win the approval of a Bitcoin ETF here in the United States,” said Mohit Bajaj, director of ETFs for WallachBeth Capital. “Those who have first-mover advantage tend to get the majority of the flow.”

William Cai, a partner at the New York-based asset manager Wilshire Phoenix, knows the pain of preparing a detailed application to the SEC for a Bitcoin ETF only to have it rejected over market-manipulation and investor-protection concerns, with the regulator turning his firm’s proposal down in February 2020. He said he’s less optimistic than some that an American Bitcoin ETF might be just around the corner.

“They’ve got the [environmental, social and governance] disclosures, they’ve got the people who made the noise on these meme stocks and Robinhood. They’ve got high-profile things that people are really pushing for,” Cai said. “Bitcoin, I just don’t see it happening this year.”

Meanwhile, Wilshire Phoenix is applying to launch another Bitcoin trust, with an eye on eventually converting it into an ETF. “That’s the way we’re keeping our options open,” Cai said.

In a recent tweet, Mike Novogratz, the billionaire founder of TSX-listed cryptocurrency investment firm Galaxy Digital Holdings, said he thinks the move toward ETFs and away from closed-end funds that Canada pioneered is part of a larger transition. Cryptocurrency’s promise has always been to eliminate middlemen and put people in charge of their own financial destinies—and Novogratz sees the decline of funds and trusts that limit access to the wealthy as a step toward that end goal.

“The ethos of crypto has always been about transitioning to a world that eliminates the rent takers,” tweeted Novogratz, who did not respond to a request for comment placed through Galaxy Digital. “I am keenly aware of the inherent contradiction of running a business while believing in eliminating rent takers.”

Fred Pye, chief executive of 3iQ, said he doesn’t agree that Bitcoin ETFs are superior to closed-end funds and will eventually replace them. His firm has applied for a new Canadian Bitcoin ETF in partnership with Jersey-based digital-asset management firm CoinShares that he expects will start trading this week, but he doesn’t intend to wind down or convert 3iQ’s existing TSX-listed product, The Bitcoin Fund.

Pye said investors who buy and hold Bitcoin in The Bitcoin Fund may find they’ve outperformed those who invested in ETFs by the end of the year. He said the two products each have pros and cons.

“The closed-end fund is an excellent product for investors who are looking to just buy and hold for a long period and hopefully outperform the price of Bitcoin,” Pye said. “Whereas people that want to be actively trading Bitcoin, they’re going to look for the most liquid, most efficient ETF.”

As 3iQ’s ETF and others come to market, the products will have to find ways to differentiate themselves in order to compete. The ETFs trading in Canada have been engaged in a marketing war by undercutting each other’s management fees, although the public won’t know which had the lowest overall management-expense ratio until they release their end-of-year filings.

“At the end of the day, I think talking about costs—differences of a few basis points between funds—is going to not be the relevant thing for investors,” said Elliot Johnson, chief investment officer with Evolve ETFs. “What they’re going to want to do is look over time and say, ‘Which of these products has actually tracked the price of Bitcoin accurately?’”

Even with more competition coming in Canada and possibly from the U.S., Purpose Investments’ Seif said he’s confident his first-mover advantage will hold.

“I don’t really judge ourselves based on, ‘Can we compete in the United States?’” Seif said. “I think we compete globally with our presence and I think we continue to prove that if you want to get exposure to Bitcoin efficiently and with a low cost, you’re going to do it through us.”