After a week of trading, digital assets have begun flowing from Grayscale’s flagship bitcoin ETF, while its TradFi rivals gain share. Here’s an analysis.
By Javier Paz, Forbes Staff
Grayscale Bitcoin Trust started off as the 800-pound gorilla of the spot bitcoin ETF brigade, but the first five days of trading have slimmed it down. The decade-old investment vehicle with more than$20 billion in assets, still dwarfs its nine newborn competitors, but while they are quickly adding assets and investors, Grayscale is losing them, perhaps more quickly than initially meets the eye.
Unlike its start-up rivals, Grayscale converted from a closed-end trust to an exchange-traded fund, an investor-friendly format designed to change hands very close to the market value of its assets. In its earlier incarnation, Grayscale traded above and below its net-asset value. Since the market upheaval known as crypto winter that began in the spring of 2022, it has been mostly below, approaching a 50% discount late that year. But as the Securities and Exchange Commission warmed to the idea of exchange-traded funds based on the spot price of bitcoin in 2023, the discount narrowed, and the agency’s green light on January 10 has reduced it to less than 0.5%. That gave investors a chance to exit at nearly face value and avoid the steep 1.5% annual fund expense fee levied by Grayscale, almost four times higher than runner-up Invesco Galaxy Bitcoin’s 0.39%.
The fund, known by its ticker symbol GBTC, had assets of $28.6 billion just before the spot bitcoin ETFs were unleashed. That had dwindled to $23.7 billion when the data were tallied for Thursday. About two-thirds of the $4.87 billion decline reflected a sliding price for bitcoin itself since January 11, down 10.9% to 41,302.
Grayscale, like most ETFs, doesn’t disclose outflow data, but a source with knowledge of its workings tells Forbes that about $500 million was withdrawn on Friday, January 12, and a similar amount the following Tuesday. Taking into account further asset declines on Wednesday and Thursday and bitcoin’s depreciation on those days, the outflow for GBTC’s first five trading days comes to approximately $1.7 billion, well above the $579 million that was widely cited in news and social-media reports on Thursday.
“We are certainly not surprised to see some of the flows in the product over the first couple of days,” Grayscale CEO Michael Sonnenshein told a television interviewer on Bloomberg in Davos, Switzerland, where he was attending the World Economic Forum’s annual meeting on Thursday. “When GBTC came to market it came with $28 billion of assets under management, tight spreads, and 10 years of operating history,” he added, indicating he feels the 1.5% expense ratio is justified.
Since the bitcoin ETFs began trading, GBTC has seen a decrease of 42 million shares, or 6.1% of the total and also a 6.1% drop in the number of bitcoin held, to 581,274. Meanwhile, the rest of the ETF field has gone from zero (excluding some small seed investments) to 74,128 bitcoin in four sessions, nearly twice the 37,914 bitcoin that GBTC lost.
GRAYSCALE COIN HOLDINGS SLIP AS RIVALS GAIN
GBTC sells bitcoin to meet redemptions; others load up to satisfy demand from new investors.
Meanwhile, BlackRock’s entry in the crypto ETF race, the iShares Bitcoin Trust (IBIT), has had just over $1 billion of inflows, making it the largest of the new funds. The other eight have drawn a combined $1.8 billion of new cash.
SMALLER, BUT NOT SMALL
The Grayscale ETF may have shrunk by almost $4.9 billion, but it remains orders of magnitude bigger than the rest of the market combined.
It is likely that the capital flight from the Grayscale fund over the past week was triggered by the most cost-sensitive GBTC investors, seeking lower fees. The two lowest are Franklin Templeton (EZBC) at 0.19% and Bitwise Bitcoin ETF (BITB), which charges 0.2%. “We are seeing some investors switching from high-fee products to low-fee options like BITB, but that doesn’t explain all the flows,” states Matthew Hougan, chief investment officer for the Bitwise fund, adding “there is significant organic demand as well.” BITB has seen its assets under management swell to $360 million, behind only Blackrock and Fidelity, which has $839 million. Both of those funds have 0.25% ratios and like Bitwise and most of the other new competitors have temporarily waived their fees.
It is too early to draw a definitive conclusion as to whether the Grayscale exodus will persist. The vast majority of GBTC investors are staying put, at least for now.