Bitcoin ETFs are coming, but what about BTC stocks and trusts?
There is a lot of speculation about what the price action will look like for Bitcoin (BTC) if the spot exchange traded fund (ETF) is approved by the United States Securities and Exchange Commission. There is currently a long list of applicants including the likes of BlackRock, Fidelity, VanEck and Bitwise. Grayscale, which won a lawsuit against the SEC in August 2023, is now looking to convert the publicly offered Grayscale Bitcoin Trust into a Bitcoin ETF.
This begs the question: Is it better or worse for investors who have their money locked up in the traditional financial space?
To complicate matters further, some companies hold bitcoins on their balance sheets and can be used as proxies to hold the asset directly.
These three options for Bitcoin investors – ETFs, trusts and proxies – each have their own advantages and disadvantages. While the sovereignty of owning Bitcoin is nothing, there are situations where people may want to choose one of these three other options.
In the United States, people often have 401K or Roth IRA retirement accounts, which traditionally invest money in the stock market. These funds generally cannot be accessed until retirement without paying large fees, but through ETFs, trusts and proxies, people can gain exposure to Bitcoin in the meantime.
All three options are passive “set it and forget it” tools, as anyone can track pedigrees and wallets or lose them due to phishing scams or other human factors.
BlackRock CEO Larry Fink said in an interview on Fox Business that Bitcoin and blockchain technology will help eliminate the need for guards from the financial industry. But, he added, “We're nowhere near there, but the technology is advancing.” Having a trusted custodian is one of the benefits Fink offers people to invest in Bitcoin ETFs.
Bitcoin ETFs
The crypto media landscape is the biggest Wall Street development in 30 years, with people like MicroStrategy founder Michael Saylor writing extensively on the potential of Bitcoin ETFs. In the United States, 28.2% of total equity trading volume in Q3 2023 came from ETFs.
Bitcoin ETFs provide cash flow to traditional finance (TradFi) investment portfolios, but are only available when the stock market is open for trading. This can be negative, as the position Bitcoin trades 24 hours a day, seven days a week prevents ETFs from trading with price fluctuations.
Some ETFs are available 24 hours a day but are still limited to weekdays. This can be an issue, as low volume price volatility over the weekend results in price changes that cannot be used until Monday when the TradFi markets open. Of course, this only affects short-term buying and selling patterns, and if Bitcoin ETF buyers are long-term investors, this price action is less important, but it should still be noted.
One of the issues that some raise in the TradFi space is the lack of regulatory oversight of the Bitcoin markets. The regulatory oversight that these ETFs receive may provide some degree of investor protection and give TradFi investors a semblance of market integrity.
Investors have added higher fees than other types of Bitcoin exposure. Some of the cheapest gold ETFs have annual fees ranging from 0.09% to 0.6%, depending on the investor's holdings. This cost percentage is important, because it eats into profits and returns to investors.
Bitcoin is trusted
Similar to a spot ETF, the trust must own the underlying asset. However, depending on the demand (in this case, Bitcoin) the ETF needs to purchase additional spot assets. A trust holds a certain amount of assets and sells shares of that total amount at the start of the trust.
Trusts can have some advantages, including periodic disclosure of their Bitcoin holdings, providing a certain level of transparency in investment. Trusts are less liquid than ETFs, making them harder to trade in secondary markets.
Another issue of trust is that it can be a pro or a con depending on where one enters the scene. Trusts allow investors to trade at a discount or premium based on fluctuations in the price of Bitcoin. The net asset value of 1 BTC may be lower than the value of the Bitcoin trust equivalent shares, so trade at a premium. The opposite is also true: the value of 1 BTC may be higher than the same shares in the Bitcoin trust, which offers a discount.
Because the trust is actively managed, there are high cash-out fees. The Greyscale Bitcoin Trust, for example, has an annual management fee of 2 percent. Compared to the lower fees of potential ETFs, this can be an important factor to consider.
Bitcoin proxies
An investor may want exposure to Bitcoin's price action but may not have direct exposure to the asset. This is where a Bitcoin proxy comes into play.
These can be companies or stocks that operate in the blockchain space or hold Bitcoin on the ledger. Bitcoin proxies in the US include public Bitcoin miners such as Marathon, Hut 8, and CleanSpark.
Also included are companies like MicroStrategy, which has 189,150 BTC, worth approximately $8.1 billion, at the time of writing.
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A traditional financial analysis of equity involves looking at the results of US generally accepted accounting principles. Under current law, Bitcoin's fall to $16,000 would have required MicroStrategy to report on its balance sheet, showing a net loss of $193.7 million in Q4 2022.
This has affected how traditional Wall Street analysts view the stock. However, this traditional measure will change in December 2024 when accounting begins to reflect the actual value of bitcoins held by a company. This means the financial numbers for companies like MicroStrategy look very different, especially if Bitcoin's spot price feels upward pressure from the upcoming halving event around April 2024.
MicroStrategy got an additional 14,620 BTC for ~$615.7 million at an average of $42,110 per #bitcoin. In the year As of 12/26/23 @MicroStrategy now hodls 189,150$BTC for ~$5.9 billion at an average of $31,168 per bitcoin. $MSTR https://t.co/PKfYY59sTW
— Michael Saylor⚡️ (@saylor) December 27, 2023
Bitcoin mining stocks (listed in the table below) have performed well in 2023, with most of them up by triple digits. These miners stand to not only increase the value of the bitcoins they sell in the future, but also stand to make more profit from the bitcoins they hold. One of the main factors when analyzing Bitcoin mining stocks is how much debt is held on their balance sheets. While this debt may allow some companies to buy new and faster mining equipment to stay ahead of the competition, the recent decline in the supply of bitcoins in the market could put some miners in a critical position if they are unable to receive mining rewards. A string of bad luck.
While proxies provide the traditional market with indirect exposure to Bitcoin, they come with the traditional market problems that all public companies face—namely, changing management mistakes, bad business practices, lawsuits, or legal red tape—all of which can have an impact. The share price.
The advantage of owning a Bitcoin proxy stock is the absence of fees in trusts or ETFs. Proxies have a job to do that generates income and profits. This means that in addition to holding bitcoins on their balance sheet, they also fall back on a cushion, reducing ownership risk. While the price of Bitcoin can affect the stock price of proxies, its functional trading can support a market price above zero. According to Michael Saylor, proxies have important capabilities that other options do not:
“EFAs are unranked and charge a fee. We empower you, but we don't charge you. We offer a high performance vehicle for people who are long Bitcoin investors. […] We can use intelligence. We can borrow money at zero percent interest for many years, and we can convert that and use that to buy Bitcoin.
The ability to take debt as collateral with Bitcoin cannot be replicated by ETFs or trusts, and could allow companies like MicroStrategy to borrow in bull markets and buy more Bitcoin in bear markets.
One issue to keep in mind when it comes to companies taking on debt and looking for financing for a Bitcoin purchase is the possibility of stock dilution.
In the year As of December 2023, MicroStrategy had 15.64 million shares outstanding, a 25.76% increase from 2022. At the time of writing, 83 shares (82.69) of MicroStrategy's stock is worth approximately 1 BTC.
The TradFi Bitcoin trilemma: ETF, trust or proxy?
Not all individuals, institutions, businesses, family offices and sovereign wealth funds are ready or able to directly own and control their own Bitcoin. Many want exposure to Bitcoin – but in the hands of people they consider trustworthy from a traditional “Web2” worldview.
For traders who pay attention to the price volatility in Bitcoin, there is an opportunity to take advantage of the immaturity of the current traditional market by understanding Bitcoin with ETFs, Trusts and proxies. The value of each can go up in times of excitement and down in times of FUD (Fear, Uncertainty and Doubt), because TradFi still doesn't fully understand this asset class. This provides opportunities to buy at a discount and sell at a premium, without trading Bitcoin itself. With retirement accounts like 401Ks or Roth IRAs in the United States and similar plans in other countries, this can be a tax-free way to trade during the Bitcoin cycle.
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Declaring the winner of this TradFi Bitcoin trilemma is not that easy. For some, owning a unit of the trust has advantages, especially if the shares trade at a discount compared to the property itself. For others, an ETF can avoid some of the higher fees associated with trust management, but fluctuations in the amount of Bitcoin held need to be closely monitored to avoid speculation.
Others may see proxies as a way to gain zero-fee exposure, but may have to deal with dramatic scandals, mismanagement and solvency problems if corporate debt defaults.
In any case, having more options to participate in the Bitcoin revolution is not a bad thing and will help pave the way for further adoption as we move into future cycles.
This article does not contain investment advice or recommendations. Every investment and business activity involves risk, and readers should do their own research when making a decision.
