Bitcoin
Winners and Losers in the US Spot Bitcoin ETF Race
While cryptocurrency has a reputation for attracting investors from outside the mainstream, the biggest winners from the recently launched bitcoin spot funds are two of the industry’s best-known names.
Since bitcoin exchange-traded funds (ETFs) began trading in the US on January 11, investors have invested $12.1 billion (£9.7 billion) into them, of which more than 80% has gone to iShares brand from BlackRock or Fidelity Investments.
“Both are great asset managers with incredible reach and stronger distribution networks […] everyone is an iShares customer, and other companies don’t have platforms like Fidelity,” says Bryan Armour, director of passive strategies research for North America at Morningstar.
Meanwhile, the Grayscale Bitcoin Trust, now ETF – the crypto tracking ETF of choice for investors before the advent of bitcoin spot funds – saw $17.2 billion go out the door.
Grayscale, which lobbied the Securities and Exchange Commission (SEC) hard for permission to launch spot bitcoin ETFs, saw its fund assets plummet to $17.6 billion from $27.2 billion in February.
“It’s been a very successful launch for spot bitcoin ETFs overall, albeit with some wild price swings,” says Armour.
“The nine new bitcoin funds gathered significant inflows, while Grayscale’s newly converted ETF saw large outflows.”
Net Inflows for Spot Bitcoin ETFs
Source: Morningstar Direct. Data from April 30, 2024
The Long Road to Identifying Bitcoin ETFs
The SEC’s approval of the first bitcoin ETFs in January was a long-awaited development by crypto enthusiasts and fund companies looking to join the fray.
Prior to this, the SEC prohibited ETFs from directly owning bitcoin. Investors who didn’t want to buy and hold cryptocurrency directly could invest in the Grayscale Bitcoin Trust or gain exposure through ETFs that tracked the price of bitcoin through futures, such as the $2 billion ProShares Bitcoin Strategy ETF (BITO). Both of these types of investments had disadvantages. The Grayscale Bitcoin Trust charged a 2% expense fee, and both methods often had difficulty tracking the price of bitcoin because of their structures.
The Grayscale Bitcoin Trust was the only way US investors could invest directly in bitcoin rather than through futures, as well as holding the cryptocurrency itself. This was because the SEC did not allow spot bitcoin ETFs – funds that hold the asset directly, rather than tracking it through futures markets. He rejected several proposals to open spot bitcoin ETFs after the first application in 2013.
Grayscale sued the agency in 2021 over its refusal to allow Grayscale to convert its trust into an ETF. The following year, Ark Investments and BlackRock (BLACK) attracted more attention by asking for approval to launch spot bitcoin ETFs. Grayscale won the case in August 2023, and on January 10, 2024, the SEC approved 11 ETF proposals. The next day, 10 of them, including Grayscale’s newly converted ETF, began trading.
Total weekly net flows for all spot Bitcoin ETFs
Data: January 11, 2024 to April 30, 2024.
Source: Morningstar Direct. Data as of April 30, 2024.
Identify Bitcoin ETF Winners and Losers
As all funds hold the same asset, they perform approximately the same, with returns for all hovering around 28% at the end of April since their launch in January.
Despite this nearly identical performance, investor responses to the new ETFs have varied widely. The iShares Bitcoin Trust ETF (I BITE) has received $15.6 billion from investors since its launch and has $16.5 billion in assets. Fidelity Wise Origin Bitcoin ETF (FBTC) saw an inflow of US$8.2 billion, with assets of US$9.2 billion.
Funds from smaller players like ARK and Bitwise also raised. The ARK 21Shares Bitcoin ETF (ARKB) raised $2.2 billion and now has $2.6 billion in total assets. Investors have put $1.8 billion into the Bitwise Bitcoin ETF (BITB), which reaches US$2 billion in assets.
Expense Ratios for Spot Bitcoin ETFs
Source: Morningstar Direct. Data as of April 30, 2024.
The most obvious loser from the release was Grayscale. Investors withdrew $17.2 billion from its ETF. Although Grayscale has reduced its ETF fees from 2.0% to 1.5%, this is still six to seven times higher than other spot ETFs, whose expense ratios range from 0.19% to 0. 25%.
Most funds temporarily cut or even eliminated fees during their initial launch period. The iShares fund reduced its expense ratio to a discount rate of 0.12%, while others, including Fidelity’s fund, reduced their ratio to zero during different introductory periods. Each fund has a different introductory offer and each one’s discount expires on a different date.
“Grayscale didn’t want to kill the goose that laid the golden eggs. They have earned over $1 billion in GBTC fees over the years,” explains Armor.
He adds, “maybe they thought they could be a [SPY-] [SPDR S&P 500 ETF Trust] or [QQQ] [Invesco QQQ Trust]-as a liquidity vehicle, being the fund ‘where traders go’. They probably also thought that switching costs due to capital gains would be high enough to keep people in the fund.”
The author or authors do not own shares in any securities mentioned in this article
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