What are the Grayscale's gold-absorbing methods? Despite the high fees and a capital outflow of over 18.6 billion, it still ranks second in BTC Spot ETF.

Author: Nancy, PANews

As the market continues to grow, the capital changes of the BTC spot ETF have become an important indicator for market observation, and the strong momentum of attracting funds can inject a strong boost into the industry. Among these ETFs, despite the continuous controversy over the outflow of funds, Grayscale still has a leading advantage in Assets Under Management, far higher than its peers, despite its high fees.

In this article, PANews will interpret the reasons behind the deep accumulation of funds in Grayscale GBTC from the perspectives of Return on Investment, Liquidity, spreads, and taxes. It should be noted that as the fee reduction period for ETFs such as FBTC, ARKB, BITB, BTCO, and EXBC approaches, it may have a certain impact on market competition shares.

GBTC cumulative net outflows exceed 18.6 billion US dollars, grayscale intends to split ETF to alleviate cost pressure

Since converting to SpotETF in January 2024, Grayscale GBTC has been facing capital outflows. SoSoValue data shows that as of July 11, the historical net outflow of GBTC has reached 18.66 billion US dollars, a figure that is almost on par with the total net inflow of funds from BlackRock.

Behind the large amount of funds in Grayscale, in addition to investors taking profits, transaction fees are also an important factor. Compared with issuers such as BlackRock, Fidelity, and Bitwise, whose management fees are 0.25% or less, GBTC’s fee rate is as high as 1.5%. Even before the SEC approved BTC Spot ETF in the United States, the other 10 ETFs reduced fees to win over investors, but GBTC did not adjust its fees.

For cost-conscious investors, GBTC is not attractive at all. In response, Grayscale CEO Michael Sonnenshein explained that the fees for GBTC are reasonable considering the fund’s size, liquidity, and strong performance over the past decade. Dan McArdle, co-founder of Messari, speculated that the simplest explanation may be the most likely. For example, Grayscale may have taken all factors into account and can make more long-term profits by maintaining a high fee rate. They have likely calculated that a certain percentage of funds will flow out at such a high fee rate, while a certain percentage will continue to remain long-term.

However, in order to deal with the competitive pressure from the fees, Grayscale has also applied for a mini version of GBTC with a fee rate of only 0.15%. Grayscale will inject over 63,000 BTC into the Mini Fund, accounting for about 10% of the existing assets of GBTC. In order to retain existing investors, the mini version of GBTC also allows them to automatically transfer to the new fund without paying capital gains tax.

In addition to BTCSpotETF, the ETH Square SpotETF, including Grayscale, may also be launched soon. Bloomberg ETF analyst Eric Balchunas predicts that the SEC may approve it on July 18. However, in terms of fees, Grayscale has not disclosed the management fees for the submitted ETH Square SpotETF and ETH Square Mini Trust revised S-1 documents. According to industry forecasts, the management fees are used by the issuance party to pay for the maintenance expenses of the fund, such as marketing expenses, salaries, and custody services. Most BTCSpotETF issuance parties choose a fee rate between 0.19% and 0.3%, and the ETH Square ETF issuance party may also do the same.

671 listed institutions layout, these factors may become the driving force for holding positions

Despite facing capital outflows in the past few months, GBTC still maintains a considerable market size compared to its many competitors. According to SoSoValue data, as of July 11th, GBTC’s net assets still reached $15.65 billion, accounting for approximately 30.9% of the total BTC Spot ETF market size, second only to the veteran player BlackRock.

According to PANews statistics, among the Top5 BTCSpotETF, GBTC has 671 holdings institutions, far exceeding other ETFs. Fintel data shows that the listed companies holding GBTC include asset management giant SIG, asset management company Horizon Kinetics Asset Management, Wall Street giant Morgan Stanley, top hedging fund Millennium Management, etc. These institutions collectively hold over 7735 shares of GBTC, with a current value of nearly $3.94 billion.

PANews compared the market performance of the Top5 BTC spot ETFs, exploring the multiple advantages of Grayscale GBTC in the ETF battle.

User base under the first-mover advantage

Compared with other BTCSpotETF issuers, Grayscale’s GBTC made its debut as early as 2013, enjoying a leading advantage of over ten years and a relatively deep user base. During this period, apart from a high premium space (up to 43%), it also attracted arbitrageurs. The significant discount of the former GBTC (up to 48%) eventually narrowed, earning the trust of many investors. Not only that, early holders also achieved a very high Return on Investment. According to Google Finance, as of July 11th, GBTC has soared by as much as 9325.9%.

Return on Investment and Anti-Fall Ability

Rate of return and risk control are important factors for investors to consider. In terms of investment returns, the average rate of return for the top five BTC spot ETFs since their listing on January 11, 2024 is 25.7%, with GBTC’s increase of 38.2% leading IBIT, FBTC, ARKB, and others. The average maximum drawdown rate for these ETFs is 22.7%, and there is no significant difference in risk resistance among them.

Liquidity and Demand Performance

Liquidity has a certain correlation with the product scale. The level of liquidity will affect the convenience and cost of investors’ transactions. The larger the circulating market cap, the better the liquidity, and the smaller the price impact caused by trading. According to VettaFi data, the average monthly trading volume of the top 5 BTC spot ETFs is $287 million, with IBIT, FBTC, and GBTC above the average level. Although GBTC ranks third with $233 million, BlackRock and Fidelity, the top two in the TradFi field, have reputation and abundant resources, making their BTC ETF products more trusted by users outside the circle. The ask price spread is an indicator of the asset supply-demand relationship. The average spread of these ETFs is 0.04%, with BlackRock at 0.02%, lower than other ETFs.

Potential Tax Issues

Although the launch of BTC spot ETF provides a more convenient and secure investment channel for long investors, capital gains tax needs to be paid, and the specific tax rate depends on the investor’s holding period. This also means that GBTC holders need to choose between fees and capital gains tax.