In the exchange-traded fund universe, size matters. And in the world of spot Bitcoin ETFs, Grayscale Investments is the giant that, if approved by the US Securities and Exchange Commission, would boast assets under management (AUM) of more than $27 billion, while others do not potential issuers start from the beginning.
For those who haven't followed the Bitcoin (BTC) ETF proposal process in detail, about a dozen issuers appear to be close to being approved by the SEC at the same time. Grayscale stands out from the crowd with its holdings of over 619,000 BTC and was launched back in 2013 as an easy way for institutional investors to gain exposure to Bitcoin without directly holding the asset.
There are other crucial factors, such as the fees charged for these products. But judging by Grayscale's proposed 1.5% fees for its proposed ETF raise, which is about 100 basis points, or a percentage point, higher than competitors, the company is betting on its volume and liquidity.
“We are massively different from any other product that will come to market because we have over a million investors and hundreds of millions of dollars in daily trading volume, and that will continue if the uplisting is approved,” to New Yorkers stock market,” David LaValle, global head of ETFs at Grayscale Investments, said in an interview.
When it comes to fees, it's not necessarily the case that investors will switch products to maintain the same exposure based solely on fees, opting for a spot Bitcoin ETF for the lower fee structures of BlackRock or Fidelity, for example. Such a step is unlikely, particularly from a tax perspective.
For example, a Grayscale investor with long-term capital gains in the 15% to 20% range would consider a long time horizon to settle this tax burden based on basis point savings. Eric Balchunas, an analyst specializing in ETFs at Bloomberg Intelligence, agrees that taxes will play a big role for many when it comes to Grayscale.
“The tax issue, I think, benefits Grayscale,” Balchunas said in an interview. “With mutual funds, there are often people who don't want to be in a particular active mutual fund that is inflated and underperforming, but the tax burden is so great after all these years of the bull market that they just stay there.”
Still, most market observers expect Grayscale to experience some outflow, especially given that the Grayscale Bitcoin Trust (GBTC) has been trading at a large discount to Bitcoin's underlying value recently.
“A lot of people bought GBTC shares and bet that it would become an ETF,” Sui Chung, CEO of crypto index provider CF Benchmarks, said in an interview. “So they buy the discount and bet that once it becomes an ETF, they can redeem it at NAV net asset value and just suck up the profit. It’s hard to say how much AUM that will be, but it will probably be a fair portion.”
There are also certain esoteric factors. While it's not Grayscale's fault, Chung said, an unknown factor is how much goodwill Grayscale has lost among investors through the years of large NAV discounts. Then there's the unfortunate fact that Grayscale's owner, Digital Currency Group, is having legal problems. “Although GBTC is in reality incapable of becoming insolvent, not every investor understands this. Some people just feel better going to BlackRock or Invesco,” Chung said. (Another DCG division, Genesis, is currently in bankruptcy court.)
But the ETF industry is complex, and even if Grayscale quickly lost a few billion in assets, the fund would still have a huge upper hand, Bloomberg's Balchunas points out.
“GBTC opening on day one with over $20 billion and daily volume of $350 million is like taking a gun to a knife fight,” he said. “Any of these products would be deadly if you had that much money in about three years, let alone in the first week. If Grayscale can convert outside of BlackRock and Fidelity on day one, it will be extremely difficult for the others.”
Although all signs point to Grayscale joining the other ETF contenders in getting the green light, the SEC may still try to prevent or delay it based on the regulator's stated goal of leveling the playing field, Balchunas said .
“You have to remember that Grayscale embarrassed the SEC when it won its case,” Balchunas said. “I'm not saying the SEC is petty, but if they really wanted revenge, I guess they could probably find some reason to mess with them over a traffic ticket. But then they could be sued again. So it's complicated.”