Grayscale’s Bitcoin Cash Cow Unscathed Despite Massive Fee
Outflows from GBTC were modest on its first day of trading as an ETF.
Grayscale dodged a bullet—at least so far.
Preliminary data from Bloomberg shows that on the first day of trading as a newly-converted ETF, investors pulled a mere $95 million out of the Grayscale Bitcoin Trust (GBTC), a much smaller sum than many had expected.
Grayscale took a gamble by leaving the expense ratio on GBTC so much higher than its competitors—1.5% versus 0.2% for the cheapest spot bitcoin ETF.
If investors had balked at the high fee, they could have pulled significant sums of money out of the fund, shrinking its size and hurting Grayscale.
But even if investors were annoyed or angry, those downbeat feelings didn’t manifest themselves into sizable outflows, preserving GBTC’s role as a cash cow for Grayscale.
With $29 billion in assets under management, GBTC’s 1.5% expense ratio translates into $435 million of annual revenue for Grayscale. To match that level of revenues, GBTC’s leading competitor, iShares Bitcoin Trust (IBIT), would have to amass $174 billion in AUM based on its current expense ratio of 0.25%.
Granted, it’s still early and investors could pull more money out of GBTC over time, hurting Grayscale. As an ETF, outflows have a direct impact on the fund’s size and by extension, Grayscale’s revenues.
That’s in contrast to the situation prior to GBTC’s conversion, when redemptions were closed and selling pressure would push the price of the trust down (often below the value of its underlying assets), but that wouldn’t impact the fees generated by Grayscale (which were based on the value of those assets).
Grayscale and Bitcoin ETFs
Yet, even if outflows for GBTC continue to pick up in the coming days and weeks, there’s a large gap between it and the next-largest U.S.-listed spot bitcoin ETFs, which currently have around $200 million in AUM.
And if outflows accelerate, Grayscale has the flexibility to cut its fee on GBTC to staunch the bleeding. This all suggests that Grayscale will retain its spot bitcoin ETF crown—at least for a while.
In fact, there is precedence for this situation.
For years, the iShares MSCI Emerging Markets ETF (EEM) was the dominant emerging markets exchange-traded fund in the U.S.
Launched in 2003, the ETF went on to accumulate nearly $50 billion of assets in its first seven years on the market.
Even as newer, cheaper alternatives like the Vanguard Emerging Markets Stock Index Fund ETF (VWO) began trading, EEM retained a substantial base of assets. It took until 2011, or six years after VWO launched, for it to surpass EEM in assets under management.
Today, EEM still has $17 billion in AUM despite charging 70 basis points in fees, 9x more than VWO.
A lot of investors in EEM held onto the fund despite there being cheaper alternatives because they didn’t want to sell their shares and incur capital gains taxes. There’s no doubt that the same predicament exists for many of the current investors in GBTC.
In other words, what’s good for Grayscale is bad for investors.
