Bitcoin ETF gradually replaces GBTC. How should Grayscale fight back?

Source: China Finance Network

The Purpose Investments' Bitcoin ETF (BTCC) has received approximately US$730 million in inflows in just one month from mid-February to March 15, and is unscrupulously eroding the market share of Grayscale's Bitcoin Trust (GBTC); some analysts even pointed out that if we have a Bitcoin ETF in the United States, there may no longer be funds flowing into any Bitcoin Trust Fund; Grayscale seems to be aware of the existence of the crisis, so how should it fight back?

On February 18, the Toronto Stock Exchange held the official launch ceremony of The Purpose Investments' Bitcoin ETF (BTCC), which is also the first ETF launched in Canada. The fund quickly absorbed more than US$333 million in market value in just two days.

The Purpose Investments’ Bitcoin ETF (BTCC) reportedly received approximately $730 million in inflows from mid-February to March 15, bringing its total holdings of bitcoins to 11,711.

Will Bitcoin ETF replace Grayscale Trust (GBTC)?

Grayscale’s competitive moat is shrinking as rival products attract investor money.

From alternatives like Osprey’s Bitcoin Fund to Bitwise’s cryptocurrency index to the Canadian Bitcoin exchange-traded fund (ETF), investors now have more options for worry-free exposure to Bitcoin.

The new Canadian bitcoin exchange-traded fund, the first of its kind in North America, could become a major force in the market, with CrossTower saying the purpose-built bitcoin ETF has seen inflows of about $730 million since its launch.

Martin Gaspar, a former Wells Fargo analyst, said that according to Glassnode data cited in the report, GBTC bought $349 million of Bitcoin in February, down from about $1.5 billion in January and December.

Shares of the Grayscale Bitcoin Trust (GBTC), which once traded at a substantial premium to the price of Bitcoin, have flipped to a discount, reflecting the drop in demand for the vehicle. The “Grayscale premium,” a measure of the difference between the market price of Bitcoin and the price implied by GBTC shares, has fallen below zero.

Source: Skew

Crypto analyst Kevin Rooke said, "I don't think we'll see a 40% to 50% premium like we saw in 2017 again, now there's institutional awareness and there are so many ways to get the same exposure." The falling premium means the trust is now trading at a consistent discount to the value of the underlying assets it holds, which CrossTower said is likely to slow GBTC's bitcoin purchases. If the U.S. Securities and Exchange Commission approves a bitcoin exchange-traded fund (ETF) this year, the Grayscale Bitcoin Trust (GBTC) may end up being marginalized.

Will Bitcoin ETF replace Grayscale Trust (GBTC)?

Steven McClurg, chief investment officer of Valkyrie Investments, said that if we have a Bitcoin ETF in the United States, there may be no more money flowing into any Bitcoin trust fund. Valkyrie Investments has submitted a Bitcoin ETF application to the US SEC.

1. High transaction fees are GBTC’s Achilles’ heel

Hypothetically, investment managers could convert GBTC into an ETF, but it would be expensive under the current fee structure compared to other ETFs already on the market. CI Global Asset Management has advertised that its Canadian Bitcoin ETF will have an annual fee of 0.4%.

2. ETF products are more transparent and can be redeemed

ETFs allow market makers to create and redeem shares at will and are generally less likely to trade at premiums or discounts if there is sufficient liquidity.

ETF instruments are more easily accepted by mutual fund managers and pension funds because they carry much less risk than closed-end trust funds such as GBTC. Retail investors may not be aware that GBTC may trade at a discount to its net asset value. Therefore, recent events may further pressure investors to shift their positions to Canadian ETFs.

In summary, the risk is significantly reduced due to the greater transparency of ETF products and the possibility of redemption in the event that shares trade at a discount.

Grayscale will not sit idly by and actively apply for an ETF

ETFs have become a $7.7 trillion industry, growing 65% in the past two years alone.

Grayscale (which, like CoinDesk, is owned by Digital Currency Group) has clearly seen the power of this, and far from sitting still, it has been buying back GBTC shares, helping to stabilize the price. In addition, the company is hiring to compete in the bitcoin ETF space.

Grayscale CEO Michael Sonnenshein said, Grayscale is constantly exploring new opportunities, such as ETFs, in response to client demand. We are the first to provide exposure to digital assets through a regulated wrapper, and our goal is to ensure that we also lead the market in any future products we launch.

James Seyffart, an ETF research analyst at Bloomberg Intelligence, said Grayscale could create a Bitcoin ETF that would be inferior to GBTC, but with lower fees than GBTC’s current 2% annual fee. Seyffart said Grayscale manages about $36 billion in assets and earns about $700 million a year).

That would give Grayscale some wiggle room to convert GBTC into an ETF, giving it the opportunity to create one of the world’s most liquid bitcoin funds, Seyffart added, but investment managers would have to act fast. Seyffart said he is now less confident that Grayscale can hold on to institutional investors after seeing volumes soar in the Canadian bitcoin ETF.

There’s also the possibility that as more institutional investors become comfortable with cryptocurrencies, they’ll be willing to hold Bitcoin directly rather than through investment vehicles that carry higher fees, Seyffyart added.