Written by: Nancy, PANews

As the market size grows day by day, the change of funds in Bitcoin spot ETFs has become an important indicator for market observation, and the strong momentum of attracting funds can inject a shot of confidence into the industry. Among these ETFs, although Grayscale has been controversial due to capital outflows, GBTC's asset management scale still has a leading advantage with a much higher fee rate than its peers.

In this article, PANews will explain the reasons behind the deep accumulation of Grayscale GBTC funds from the perspectives of return on investment, liquidity, spreads and taxes. It should be noted that as the fee reduction cycle of ETFs such as FBTC, ARKB, BITB, BTCO and EXBC approaches, it may have a certain impact on market competition share.

GBTC's cumulative net outflow exceeds US$18.6 billion, Grayscale intends to split ETF to ease fee pressure

Grayscale GBTC has been facing capital outflows since its conversion to a spot ETF in January 2024. SoSoValue data shows that as of July 11, GBTC's historical net outflow has reached US$18.66 billion, a figure that is almost the same as BlackRock's total net inflows.

In addition to investors' profit-taking, handling fees are also an important reason behind the large amount of Grayscale funds. Compared with the management fees of issuers such as BlackRock, Fidelity and Bitwise, which are all 0.25% or less, GBTC's fee rate is 1.5%. Even before the US SEC approved the Bitcoin spot ETF, the other 10 ETFs all reduced their fees to gain investor favor, but GBTC did not adjust.

For cost-conscious investors, GBTC is not attractive at all. In this regard, Grayscale CEO Michael Sonnenshein once explained that GBTC's fees are reasonable given the fund's size, liquidity, and good performance over the past decade. Messari co-founder Dan McArdle also speculated that "the simplest explanation may be the most likely. For example, Grayscale may have taken all factors into consideration, and maintaining high fees can help them make more money. They may have calculated what percentage of funds will flow out based on such a high fee rate, and what percentage of funds will continue to remain for many years."

However, in order to cope with the competitive pressure from these competitors' handling fees, Grayscale also applied for a mini version of GBTC with a fee rate of only 0.15%. Grayscale will inject more than 63,000 bitcoins into the Mini Fund, accounting for about 10% of GBTC's existing assets. In order to retain existing investors, the mini version of GBTC also allows them to avoid paying capital gains tax for automatic transfers to new funds.

In addition to the Bitcoin spot ETF, Ethereum spot ETFs including Grayscale may also be launched soon. Eric Balchunas, an ETF analyst at Bloomberg, predicts that the SEC may approve it on July 18. However, Grayscale has not disclosed the fee rate in the revised S-1 documents submitted for the Ethereum spot ETF and Ethereum Mini Trust. According to industry forecasts, the management fee is used by the issuer to pay for the maintenance costs of the fund, such as marketing expenses, salaries and custody services. Most Bitcoin spot ETF issuers choose a fee rate between 0.19% and 0.3%, and the Ethereum ETF issuer may do the same.

671 listed institutions have invested in the stock. These factors may become the main driving force for holding stocks.

Although GBTC has faced capital outflows in the past few months, its market size is still relatively impressive among many competitors. SoSoValue data shows that as of July 11, GBTC's net asset value still reached US$15.65 billion, accounting for about 30.9% of the total size of Bitcoin spot ETFs, second only to the old money player BlackRock.

According to PANews statistics, among the top 5 Bitcoin spot ETFs, GBTC has 671 holding institutions, far exceeding other ETFs. Fintel data shows that listed companies holding GBTC include asset management giant SIG, asset management company Horizon Kinetics Asset Management, Wall Street giant Morgan Stanley, top hedge fund Millennium Management, etc. These institutions hold more than 7,735 shares of GBTC, currently worth nearly US$3.94 billion.

Below, PANews compares the market performance of the top 5 Bitcoin spot ETFs, exploring the multiple advantages of Grayscale GBTC in the ETF war.

User base under first-mover advantage

Compared with other Bitcoin spot ETF issuers, Grayscale's GBTC debuted as early as 2013, with a lead of more than ten years and a relatively deep user base. During this period, in addition to the higher premium space (up to over 43%) that also attracted arbitrageurs, the large discount of the former GBTC (up to over 48%) eventually narrowed, which also earned the trust of many investors. Not only that, early holders also received extremely high returns on investment. Google Finance shows that as of July 11, GBTC has risen by as much as 9325.9% so far.

Return on investment and resilience

Return rate and risk control are important factors for investors to consider. In terms of investment returns, since its listing on January 11, 2024, the average return rate of the top five Bitcoin spot ETFs is 25.7%, among which GBTC has increased by 38.2%, ahead of IBIT, FBTC, ARKB, etc. The average maximum retracement rate of these ETFs is 22.7%, and there is no obvious gap in risk resistance among them.

Liquidity and demand performance

Liquidity is correlated to product size. The level of liquidity will affect investors' trading convenience and cost. The larger the circulating market value, the better the liquidity, and the smaller the price impact caused by the transaction. VettaFi data shows that the average monthly trading volume of the top 5 Bitcoin spot ETFs reached US$287 million, of which IBIT, FBTC and GBTC were above average. Although GBTC ranked third with US$233 million, the top two BlackRock and Fidelity have reputation and abundant resources in the traditional financial field, and their Bitcoin ETF products are more likely to gain the trust of users outside the circle. The bid-ask spread is an indicator of the supply and demand relationship of assets. The average spread of these ETFs is 0.04%, of which BlackRock is 0.02% lower than other ETFs.

Potential tax issues

Although the launch of Bitcoin spot ETF provides more investors with a more convenient and safe investment channel, it is also subject to capital gains tax, and the specific tax rate depends on the investor's holding period. This also means that GBTC holders need to make a trade-off between fees and capital gains tax.

Previously, CoinTracker's tax director Shehan Chandrasekera wrote an article explaining that if Bitcoin ETF assets are sold within less than one year of holding, the resulting short-term capital gains will be subject to ordinary income tax, and the tax rate may be between 10% and 37% depending on the overall taxable income and declaration status; if the ETF assets are held for more than 12 months and then sold, long-term capital gains will be subject to capital gains tax, and the tax rate may be 0%, 15% or 20%; if the income exceeds a certain threshold, in addition to the above capital gains tax, a 3.8% tax may also be required.