Over the past few years, cryptocurrency has evolved from a fringe topic to a mainstream financial conversation. In Canada, regulators have taken a measured approach, approving certain crypto-based ETFs while maintaining consumer protection as a top priority. For investors who are crypto-curious, but hesitant to hold digital assets directly, ETFs can offer a regulated entry point.
But not all crypto ETFs are the same. In Canada, most fall into one of two categories: spot-based and futures-based. Understanding the difference can help investors choose a product that aligns with their goals, comfort with risk, and investment horizon.
What’s the Difference Between Spot and Futures Crypto ETFs?
Spot ETFs are generally designed to closely track the real-time market price of the cryptocurrency itself. They do so by holding actual cryptocurrency, such as Bitcoin or Ethereum. These ETFs are physically backed, meaning the fund provider purchases and stores the crypto on behalf of investors, usually in cold storage with a qualified custodian. This helps to minimize the hurdles of crypto wallets, direct storage, and exchange fees that investors tend to navigate when investing in cryptocurrencies directly.
While storage and security risks are often inherent to cryptocurrencies themselves, one of the key benefits of spot ETFs is that they aim to relieve investors of the need to manage these risks directly. Instead, the responsibility lies with professional custodians and fund managers. That said, spot ETFs are still subject to regulatory oversight and cybersecurity considerations, which can affect investor confidence and fund performance.
On the other hand, futures-based ETFs do not hold any actual crypto. Instead, they invest in derivatives, specifically, futures contracts traded on regulated exchanges such as the Toronto Stock Exchange (TSX). These contracts allow the fund to speculate on the future price of a cryptocurrency, such as Bitcoin. These ETFs can provide exposure to crypto price movements without the fund owning any actual coins.
Crypto Volatility: What to Know Before You Invest. Risks and considerations
Futures ETFs may be subject to greater tracking error than spot ETFs due to their reliance on derivatives. This can cause performance to diverge from the actual spot price of the asset. One contributing factor is market structure — for example, contango, where futures prices are higher than the spot price, can erode returns over time. Conversely, in periods of backwardation, where futures prices are lower than the spot price, the roll yield can be positive. Additionally, since futures contracts must be ‘rolled over’ upon expiration, the associated costs can also impact overall performance. Futures contracts have to be rolled over because they have a finite expiration date. Unlike stocks, which represent a share of ownership in a company, a futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date. When that date approaches, the contract expires.
Like the underlying assets they track, crypto ETFs can be highly volatile. The value of your investment can rise or fall rapidly in response to changes in the broader crypto market. There are a few specific considerations investors should be aware of when investing in cryptocurrency ETFs.
- Liquidity Can Vary: While many ETFs trade on established Canadian exchanges like the TSX, trading volumes can differ significantly. Thin liquidity may affect how easily you can buy or sell units.
- Market Timing Matters: Because crypto prices move 24/7 an ETFs only trade during market hours, there may be gaps between price changes and ETF valuations.
- Custodial and Counterparty Risk: For spot ETFs, some risk lies in storage and safekeeping. For futures-based ETFs, the exposure to market intermediaries and roll-over strategies can impact performance.
Tax Treatment in Canada
For tax purposes, gains from selling crypto ETFs are generally considered capital gains, while any distributions received may be taxed as income. Investors should be aware of the ETF’s structure and consult with a tax advisor to understand how it fits into their broader financial plan.
Crypto ETFs in Registered Accounts?
Some crypto ETFs are eligible to be held in registered accounts such as Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA). However, eligibility may depend on whether the ETF is classified as a “qualified investment” under the Income Tax Act. Investors should check the fund’s prospectus or consult with a financial professional to confirm.
Choosing What’s Right for You
Spot-based and futures-based crypto ETFs each come with unique benefits and risks. Spot ETFs may offer more direct exposure, but involve custody and security concerns. Futures ETFs may be more liquid and familiar to traditional investors, but may come with performance drag due to futures pricing mechanics.
No matter your level of experience, it’s important to assess your risk tolerance, time horizon, and investment goals. Qtrade empowers you to do your own research and invest in a diversified range of cryptocurrencies through over 150 crypto ETFs — including 2 commission-free options – before making decisions involving complex or volatile asset classes like crypto. And remember, just because it’s available doesn’t mean it’s right for every portfolio.