New virtual money concept, Gold Bitcoins

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Bitcoin is currently one of the hottest asset classes in investing, with both institutional and retail investors piling in. After years of ups and downs, it went to the moon in 2021, delivering over 156.68% YTD but with gut-wrenching volatility at times. We’ve seen Bitcoin soar from $23,805 per coin at the start of December 2020 to a high of $78,402 in April 2021, before plummeting again to a low of $37,340 in July 2021.

How to get in on the action

Since then, Bitcoin has staged another rally to a new all-time high of $84,607 in November 2021 before shedding nearly 26.60% since last month, currently trading at $61,105.17. Despite the roller-coaster ride, investors have been “HODLing” (holding on for dear life) and consistently bought the dips have reaped fat gains. Being down nearly 26.60% over the last month from all-time highs could represent an excellent entry point into Bitcoin.

Traditionally, Canadian investors bought Bitcoin on coin exchanges such as Binance, Shakepay, Newton, and now Wealthsimple Crypto, and either held it online in their “hot wallet” or offline in their “cold wallet.” The problem with these methods is that every sale is a taxable event, meaning that when you sell your Bitcoin (hopefully not at a loss), you pay capital gains tax, which could eat up your once juicy gains. Currently, there is no way to hold actual Bitcoin in a tax-advantaged account, such as a Tax-Free Savings Account (TFSA).

ETFs to the rescue

Fortunately, fund providers like Purpose Investments have introduced numerous exchange-traded funds (ETFs) that track the spot price of Bitcoin. These ETFs hold the underlying Bitcoin in offline cold storage with a custodian, and divvy it up into shares, which are bought and sold on the stock market during normal trading hours. Buying a share of these ETFs essentially gives you exposure to a proportionate amount of Bitcoin. What’s cool is that these ETFs can be held in your TFSA, meaning that when you sell, you pay zero income tax.

The dominant ETF at this time is the Purpose Bitcoin ETF (TSX:BTCC.B). This ETF currently has assets under management (AUM) of $1.8 billion and holds 28,145.42 Bitcoin, which works out to around 0.00013125 Bitcoin per share. Holding this ETF will cost you a 1.00% management fee annually (taken out of the funds overall performance), plus additional trading and tax costs within the fund. However, Purpose Investments has stated they will cap the overall management expense ratio (MER) at 1.50% to keep costs reasonable and in line with other actively managed alternative asset class ETFs.

The Foolish takeaway

Physical Bitcoin ETFs that trade on the Toronto Stock Exchange are best suited for investors looking to diversify their TFSA or other registered accounts, given that actual Bitcoin currently cannot be held. These ETFs offer numerous advantages over futures-based Bitcoin ETFs or close-ended Bitcoin funds, including less tracking error, fewer discrepancies between the market price and net asset value of the fund, and superior liquidity. They also come with the potential for large tax-free gains, ease of buying/selling on an exchange, and diversification benefits.

However, investors need to be aware of a few risks prior to buying one of these Bitcoin ETFs. Firstly, the underlying asset is highly volatile. Intra-day losses of up to 10% are not uncommon and may not be suited to investors with a low risk tolerance, a short time horizon, or investment objective focused on capital preservation. Secondly, unlike Bitcoin, these ETFs do not trade 24/7. After-hour and weekend fluctuations in the underlying can leave you with massive losses at the opening bell during the start of a trading week. Finally, some of these ETFs are not currency hedged, meaning that fluctuations in the FX rate between the CAD/USD can introduce additional volatility that alter your returns in the short term.



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