Will Grayscale Survive the Bitcoin ETF Era?

For years, institutions seeking Bitcoin exposure have turned to grayscale investments, with more than $28 billion in BTC assets under management (AUM) repeatedly undermining its closest competitor.

That all changed on January 11, after 10 firms received spot bitcoin (BTC) exchange-traded funds (ETFs) approval from the US Securities and Exchange Commission (SEC) for the first time in the United States. The firms included Grayscale, which converted the decade-old Grayscale Bitcoin Trust (GBTC) into an ETF.

January 11 was a special moment not only for the crypto world but also for Wall Street. “It's very rare to find a new asset class in the ETFs lexicon,” Todd Sohn, ETF strategist and managing director of Strategas Asset Management, told Cointelegraph. “We had stocks in 1993, bonds in 2002 and gold in 2004.”

But in addition to opening up a relatively unknown asset class to retail investors, January 11 also ushered in competition. Which of the new EFAs will win?

Wall Street giants BlackRock and Fidelity Investments? Or more crypto-focused asset managers like ARK Invest or Bitwise, both of which raised more than $500 million in AUM in the first two weeks? Or maybe the current grayscale, long unchallenged? The 2% annual management fee for ETF launches has been reduced to 1.5%.

In terms of GBTC, it has a head start compared to others, Sohan said, “But if we are to take these first two weeks as any indication, issuers like BlackRock and Fidelity are very serious about this product.

Greyscale experienced significant inflows in the first two weeks after launch, but after losing $5 billion in redemptions, it held $20.2 billion in AUM as of January 26. In contrast, BlackRock had about $2 billion and Fidelity $1.75 billion at Friday's close. , go back with other ETFs.

Still, is GBTC likely to continue its big lead over TradFi asset managers into next year?

And in the long run, will we look back on January 11 as a form of protection, when blockchain startups and crypto-centric companies begin to be swallowed up by Wall Street's leviathan?

An industrial hanger?

The price of Bitcoin fell on the first day of the ETF's launch – nearly 20% – and raised questions about whether the crypto industry is perhaps expecting too much from the new investment vehicles.

For example, on January 23, analysts at JPMorgan noted that “the ecosystem in Bitcoin ETFs has allowed market participants to exit the winter.”

Were Bitcoin ETFs the most requested of the space?

“I remember that the underlying bitcoin had a big build-up before the launch of these funds, so the pause is not too surprising,” Son said. On January 29, Bitcoin regained some momentum by lifting above $43,000 in the afternoon.

“Gold [in 2004] It traded sideways for a short time before picking it up again,” Son added.

Latest: Bitcoin price drops significantly after launch of BTC spot ETFs. Source: Cointelegraph

In fact, the first gold ETF amassed more than $1 billion in assets in its first three days since November 18, 2004, “which cemented its place in history as the largest ETF ever attracted.” Institutional Investor.

The SPDR Gold Trust ETF (GLD) “improved the gold business” and after three years had $10 billion in AUM.

But for Son's point: In the first half of the GLD's launch, from October 2004 to April 2005, its price on the New York Stock Exchange fell little.

Is the price of BTC disappointing?

Coming back to the present, the total outflows from GBTC and the other nine ETFs are already declining. They were positive on January 26 for the first time in seven days.

“Selling pressure from investors taking profits from GBTC will eventually reduce selling in the currency,” Peter Sean Gulley, vice president of financial services at Manulife Financial Advisors, told Cointelegraph.

Some of the leaks, such as “the offloading of 22 million GBTC shares — at a cost of $1 billion — by FTX's bankruptcy estate — were considered one-time events,” Gilley added.

“I have not had much trouble with GBTC withdrawals and transfers from grayscale,” Justin d'Anetan, head of business development, APAC, at Keyrock, a cryptocurrency market maker, told Cointelegraph. “A lot of people think those are negative [news] For the price though I don't think this is necessarily the case.

This is primarily the result of GBTC management fees, which are higher for many reasons than most new Bitcoin EFTs, as people “come from the former to the latter cycle simply to ride,” D'Anetan said.

The structure or value of the underlying product hasn't changed, of course. Now it is much cheaper to buy BTC at Blackrock “store” or Fidelity Investments “store” than GBTC.

“The main question – to which we do not know the answer – is how much AUM will release,” Sohn added. “Is there a pain point where Greyscale cuts its 1.5% fee? That could have huge implications for who buys as the king of AUM.”

Do others prefer grayscale?

Two weeks after its launch, Grayscale said: “It should be noted that the largest AUM position remains the Bitcoin ETF and will probably hold that position for the foreseeable future.” Many owners indicated that they feel comfortable with the grayscale organization, due diligence and business relationships.

“they [Grayscale] Seong Kim, an associate professor of finance at Santa Clara University's Leigh School of Business, told Cointelegraph. “Also there is a switching cost. It's one of the reasons why people still stick with grayscale despite the high fees. [they may] If you switch, you will trigger a tax liability.

“In the long term, other ETF providers may eventually catch up with Greyscale,” said D'Anettan, “but for now, it's important to remember that the lead is at least $15 billion in AUM larger than its nearest competitor.”

Still, the big trend over the past 10 years has been low-fee, passively managed index equity ETFs in favor of actively managed high-fee equity mutual funds, Bloomberg analyst Eric Balchunas noted in a recent post. Arguably, this puts nine other Bitcoin ETFs more in line with investor preferences than the high-fee GBTC.

Check out GBTC vs Nine Cumulative Flow Chart with Chart Tracker Active vs Passive Funds (High Cost vs Low Cost) via @JSeyff: pic.twitter.com/1s790DzVcd

— Eric Balchunas (@EricBalchunas) January 27, 2024

Kim also pointed out that Grayscale had payment problems. “These grayscale outflows are going to create opportunities,” she told Cointelegraph, “especially since BlackRock, Fidelity and others are charging very low fees.” she added.

“There was a lot of frustration among investors. [pre-Jan. 11] Because Greyscale's share price was trading below NAV. [net asset value]And there was nothing anyone could do with the way the redeemers worked. There was no good method of screening and finding market value.

Meanwhile, Grayscale is charging 150 basis points (bps) after the launch of the ETF. By comparison, BlackRock was paying 12.5 bps for the ETF, while Fidelity waived the fee entirely until August 1.

“Investors who allocate to ETFs are very cost-conscious. Every fundamental point is important,” Ryan Rasmussen, senior crypto research analyst at Bitwise, told Cointelegraph. “This leaves room for a new low-cost leader to emerge in the Bitcoin ETF battle.”

NFTY Labs CEO James Lawrence told Cointelegraph, “I believe the big ETFs like BlackRock and Fidelity are bigger in terms of popularity and trading volume.

Their “established names” and scale give them an advantage, “specifically Fidelity providing the protection service.” I expect a rapid shift to the market dominance of these traditional financial giants.

“BlackRock's IBIT will be a very close competitor to GBTC,” Gilley explained, though he didn't rule out loyalty, particularly in what he sees as a “strong selling point” of the trail manager solution.

Bitwise focuses primarily on crypto products and has “a large support base and brand recognition with early adopters of cryptocurrencies in the crypto space, so Bitwise can be competitive.”

A changing of the guard?

If BlackRock, Fidelity, and perhaps some other Wall Street firms are eclipsed, does this signal a shift in the guard, i.e., a takeover of giant traditional financial firms or a shift to crypto startups or crypto-focused firms?

“I think you'll have one side of the industry using TradFi solutions because they're comfortable with ETF wraps and the protections around them — and maybe their parent companies want that,” Son said.

“But crypto startups and innovators are always needed to push the industry forward,” he said.

“The new kid on the block opens eyes to new perspectives and solutions. Many industry participants want to find solutions that way as opposed to the ETF/TradFi vehicle.”

“I don't see traditional finance completely swallowing up crypto startups,” Lawrence said. Larger players are often more vulnerable, and their regulatory and compliance assurance may take time. Many crypto startups, especially in the decentralized finance subsector, are likely to be targeted by large TradFi firms in his view.

Gully agrees that the future direction of cryptocurrencies will be dominated by giant TradFi companies and asset managers like BlackRock and Fidelity, “but small crypto startups still have an important role to fill – as a bed of crypto and blockchain innovation, as well as providing alternative products and solutions for the market.”

A “critical moment” for crypto?

It may take some time to understand what all this means for cryptocurrency adoption. While spot market ETFs are just another piece left in the puzzle, other key pieces are still missing. D'Anetane said:

“While the new ETFs make crypto exposure easier, the actual trading of ‘physical' Bitcoin is much more difficult thanks to regulatory and fiscal restrictions.”

That said, the new spot market ETFs “represent a huge milestone in terms of crypto awareness,” d'Anethan continued. Many traditional market makers and funds already have some exposure to crypto, “but now other giant asset managers and pension funds are allocating some AUM from crypto-linked ETFs to increase the position and prices.”

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Sohan added, “This is a win-win move for issuers, given the popularity of crypto, even if it's polarized, and it's a solution provider.”

“It's not every day you see the world's biggest financial institutions and the U.S. government put their stamp of approval on a new asset class,” said analyst Rasmussen, describing January 11 as “moon landing time.”

“But the market is big enough for crypto-native firms and traditional financial institutions to coexist.”