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Spot Bitcoin ETF Race Kicks Off With a Fee War


On January 10, 2024, the U.S. Securities and Exchange Commission formally approved a rule change to allow the listing and trading of spot bitcoin ETFs. Spot bitcoin ETFs track benchmark index prices for bitcoin, rather than for related instruments like bitcoin futures.

It is a landmark development because it makes cryptocurrency trading more mainstream in the U.S. and also validates the popularity of the ETF product structure. While bitcoin ETFs were launched in Canada in 2021, multiple spot bitcoin filings in the U.S. were rejected by the SEC, starting with the first filing in 2013. However, exchange traded products tracking cryptocurrency futures, including leveraged futures based products, were approved. Grayscale questioned the inconsistency of this approach in a lawsuit against the SEC, where they proposed converting their bitcoin trust (GBTC) into an ETF, and their victory in that case paved the way for the eventual approval of spot bitcoin ETFs. Ten spot bitcoin ETFs, including Grayscale’s converted fund, began trading in the U.S. on January 11, 2024 (Table 1). An 11th product, the Hashdex Bitcoin Futures ETF (DEFI), also received listing approval from the SEC but will only convert to a spot product from its current strategy of tracking bitcoin futures after its registration statement is approved by the SEC.


The launch of these funds has been characterized by a fierce fee war. As shown in Table 1, six of the 10 issuers have set their net expense ratios to zero for the first few months or until a minimum asset threshold is reached. Additionally, BlackRock has also waived part of its fee, lowering it to 0.12% for the first 12 months or till the fund hits $5 billion in assets, whichever occurs first. Grayscale is the only issuer with a significantly higher fee than its peers, at 1.5%, while all the others are below 0.4%. It must be noted, however, that Grayscale did lower its fee significantly after converting its bitcoin trust, which had a fee of 2% prior to conversion.

The first day of trading on January 11, 2024, saw $4.6 billion of shares traded, early validation for these new products. These launches mark the culmination of several milestones and setbacks in the multi-year path to spot bitcoin ETFs trading in the U.S. The very first spot bitcoin application in the U.S. was submitted in 2013. In that same year, Grayscale launched its bitcoin ETF trust, which was available only to accredited investors at the time. In 2017, the SEC rejected the first application, which was followed by multiple denials to other firms. The start of bitcoin futures trading in December 2017, and the subsequent launch of ETFs linked to these contracts in 2019 were significant positive milestones. It paved the way for Grayscale to file a lawsuit against the SEC, and a positive verdict in that case effectively opened the door to approval for all spot bitcoin issuers.


The launch of spot bitcoin ETFs is significant because it is superior to the prior alternatives that U.S. investors had to get cryptocurrency exposure. These prior options for crypto exposure are summarized in Table 2.


Many of the instruments listed in Table 2 had drawbacks for investors. For example, Grayscale’s GBTC (prior to conversion) gave investors access to spot bitcoin, but often traded at a discount to its net asset value since it did not have an inbuilt create/redeem mechanism that most ETFs benefit from. Cryptocurrency futures ETFs have average fees of 0.92%, significantly higher than those charged by spot bitcoin ETFs, even after their fee waivers expire. Also, in theory, futures based ETPs can suffer from roll costs or may diverge from spot prices, although this was not a problem in practice for crypto futures ETFs as they tracked closely to spot prices.

Some investors also used fintech themed ETFs like the ARK Fintech Innovation ETF (ARKF) that typically hold stocks of firms like Coinbase that have a high exposure to crypto. However, crypto themed equity ETF prices do not always track to spot crypto since there are very few pure-play crypto themed stocks and since these ETFs are correlated to the broader equity market. Retail investors also use exchanges like Coinbase and Binance to trade cryptocurrencies, but these exchanges either suffer from a lack of regulatory clarity in the U.S. or operate offshore outside of the purview of U.S. regulators. The recent FTX scandal highlighted the issues with using offshore entities as avenues to invest.

It is important to note that while spot bitcoin ETFs overcome many of these disadvantages, they also have some drawbacks. For example, the SEC did not approve in-kind create/redeems, which is typical of most ETFs. While the in-kind creation/redemption process is the most tax-efficient structure, spot bitcoin ETFs will instead have to use cash creations and redemptions. In a few more months, data should be available on how this impacts spot bitcoin ETFs.

It is clear that the launch of spot bitcoin ETFs was eagerly anticipated by investors and the industry. The price of bitcoin had already appreciated by 155% in calendar year 2023 to $42,265, in advance of the potential approval. Whether these ETFs can appreciate further in the near term, given this anticipatory runup, is unclear. In the longer term, however, these products should benefit from financial advisors considering them since they offer significant advantages over the earlier options for accessing cryptocurrency exposure.

 

Aniket Ullal is VP, ETF Data and Analytics for CFRA, one of the world’s largest providers of independent investment research. Aniket founded First Bridge Data, a leading source for global ETF data and analytics that was acquired by CFRA in August 2019.

Prior to starting First Bridge, he had product management responsibility for S&P’s US indices, including the widely followed S&P 500 and S&P/Case-Shiller indices. These indices have over $1 trillion in ETF assets tracking them.

Aniket is the author of ‘ETF Investment Strategies’ (McGraw-Hill; 2013). He is a graduate of Northwestern’s Kellogg School of Management and the Indian Institute of Management in Ahmedabad.



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