Assets Under Management AUM

Cheap Bitcoin Fire Sale! How to buy the drop in your TFSA

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Bitcoin is currently one of the hottest asset classes for investing, with institutional and retail investors flocking to it. After years of ups and downs, it hit the moon in 2021, delivering over 156.68% year-to-date, but with heart-wrenching volatility at times. We saw Bitcoin drop from $ 23,805 per coin in early December 2020 to a high of $ 78,402 in April 2021, before falling back to a low of $ 37,340 in July 2021.

How to get into the action

Since then, Bitcoin has staged another rally to hit a new all-time high of $ 84,607 in November 2021 before losing nearly 26.60% from last month, currently trading at $ 61,105.17. Despite the roller coaster ride, investors were “HODLing” and consistently buying as the lows reaped big gains. Being down almost 26.60% over the past month from all-time highs could represent a great entry point into Bitcoin.

Traditionally, Canadian investors would buy Bitcoin on coin exchanges such as Binance, Shakepay, Newton and now Wealthsimple Crypto, and keep 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, which means that when you sell your Bitcoin (hopefully not at a loss) you are paying capital gains tax, which could eat into your once-juicy winnings. . Currently, there is no way to hold real 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 many exchange-traded funds (ETFs) that track the spot price of Bitcoin. These ETFs hold the underlying Bitcoin in an offline cold store with a custodian and divide it into shares, which are bought and sold on the stock exchange during normal trading hours. Buying a share of these ETFs essentially gives you exposure to a proportional amount of Bitcoin. The good thing is that these ETFs can be held in your TFSA, which means when you sell you pay no income tax.

The dominant ETF at the moment is the Bitcoin ETF objective (TSX: BTCC.B). This ETF currently has assets under management (AUM) of $ 1.8 billion and holds 28,145.42 Bitcoin, which equates to approximately 0.00013125 Bitcoin per share. Holding this ETF will cost you a management fee of 1.00% per annum (taken out of the overall performance of the fund), as well as additional trading and tax fees within the fund. However, Purpose Investments has said it 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.

Madness to take away

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 cannot currently be held. These ETFs offer many advantages over Bitcoin ETFs based on futures or closed Bitcoin funds, including fewer tracking errors, fewer spreads between the market price and the fund’s NAV, and liquidity. superior. They also offer the potential for significant tax-free earnings, ease of buying / selling on the stock exchange, and diversification benefits.

However, there are a few risks that investors should be aware of before purchasing any of these Bitcoin ETFs. First, the underlying asset is very volatile. Intraday losses of up to 10% are not uncommon and may not be suitable for investors with a low tolerance for risk, a short time horizon, or an investment objective focused on preserving capital. Second, unlike Bitcoin, these ETFs do not trade 24/7. Fluctuations in the underlying after hours and on weekends can leave you with massive losses at the opening bell at the start of a trading week. Finally, some of these ETFs are not currency hedged, which means that fluctuations in the exchange rate between CAD / USD can introduce additional volatility that alters your short-term returns.