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Grayscale Plans On Converting GBTC To An ETF; Here's Why That's Not A Good Idea

The better option might be to keep GBTC the way it is and launch a separate bitcoin ETF when they get approved.

When it comes to investors looking for bitcoin exposure in their portfolios, there are only a couple of options currently available.

Of course, they can open an account on a crypto exchange and buy it directly. That's the most straightforward option, but some investors are still hesitant about the idea of crypto wallets and irretrievable passwords.

The other primary option is the Grayscale Bitcoin Trust (GBTC) (there's also the Osprey Bitcoin Trust (OBTC), which is a lower cost, somewhat less liquid option). This is an exchange-traded product that you can buy and sell on virtually any platform, but it's not a one-to-one proxy for bitcoin. Because it trades on an exchange, it can sell for above or below the net asset value, much in the same way that closed-end funds do. That makes it a good proxy, but not a great one.

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As it stands today, GBTC trades at roughly an 8% discount to its NAV. Contrast that to past years where GBTC routinely trading at a significant premium to NAV, occasionally more than 100%.

GBTC Price & NAV

GBTC Price & NAV

We talk about products, such as GBTC, because there is no bitcoin ETF, which would solve a lot of these issues. The SEC has been firm in its stance that cryptocurrencies are susceptible to fraud, theft and speculation. Given SEC Chair Gary Gensler's recent commentary on cryptocurrency, there door is slightly ajar for the approval of a bitcoin ETF, but it doesn't appear it's happening anytime soon. I think we're looking at 2022 at the earliest and maybe even into 2023.

Grayscale is ready to move though. The company has already announced that it plans on converting GBTC into an ETF when it has the opportunity to do so and has even brought BNY Mellon on board to provide assistance in making the conversion.

Grayscale appears to be taking all the necessary steps to convert GBTC into an ETF. The big question now is should it?

Should Grayscale Convert GBTC To An ETF?

This article provides a nice synopsis of the major differences between a trust and an ETF in terms of how they're structured, how they trade and some of the major advantages/disadvantages.

The Cliffs Notes version is this:

  • ETFs almost always trade right at (or very closely to) their NAV. The price of a trust is often different from the NAV and can affect the returns that shareholders experience.
  • ETFs create and redeem shares all the time, which allows them to trade right at NAV. Trusts have a fixed number of shares, which results in the deviations from NAV.

I think most people agree (myself included) that an ETF is a better structure for holding bitcoin than something like GBTC. From an investor standpoint, that means it should be converted to an ETF. For Grayscale, there's a case to be made that they shouldn't convert it.

The quick answer why is fees and assets.

As of right now, GBTC has more than $29 billion in assets and charges a 2% annual fee to shareholders. That translates to $580 million a year in fees that Grayscale is collecting on this product.

OBTC is already trying to compete with GBTC on price by charging just 0.49% annually for a substantially similar product. It's had some success with OBTC attracting $130 million in assets to date, but that's still less than 0.5% of GBTC's size.

A bitcoin ETF's expense ratio will probably come in at a similar level, if not cheaper. The big question is whether or not a low cost ETF will be enough to draw significant assets away. I don't think it will.

That means Grayscale may have limited motivation to convert GBTC into an ETF.

Why Grayscale Should Keep GBTC The Way It Is

Looking at things purely from Grayscale's perspective, do they really want to give up all that revenue? We've already seen from the Osprey example that offering the same product for 1/4 of the cost hasn't put a dent in Grayscale's dominance. A bitcoin ETF would likely attract a much larger potential audience than a competing trust would, so there's the possibility that it could do a better job of drawing assets away, but to a significant degree? I'm skeptical.

Grayscale may be better served by keeping GBTC just the way it is and launching a bitcoin ETF to go side by side with it. This is a strategy that we've seen multiple issuers utilize when it comes to offering investors a cheaper alternative to an existing product.

Take, for example, the Invesco QQQ Trust (QQQ) and the Invesco Nasdaq 100 ETF (QQQM). Both are exchange-traded funds that track the Nasdaq 100. The only material difference is that QQQ charges 0.20% and QQQM charges 0.15%. Why didn't Invesco just drop the expense ratio on QQQ to 0.15% instead of going through the process of launching a second identical ETF? Simple. They don't want to sacrifice fees.

The iShares MSCI Emerging Markets ETF (EEM) and the iShares Core MSCI Emerging Markets ETF (IEMG) are another case. So is the iShares MSCI EAFE ETF (EFA) and the iShares Core MSCI EAFE ETF (IEFA). Technically, the indexes within the pairs are slightly different, but the difference is negligible. The differentiator is expense ratios. EFA and EEM charge 0.32% and 0.70%, respectively. IEFA and IEMG charge just 0.07% and 0.11%.

If investors want the cheaper alternative, they have it. But Invesco doesn't want to give up all that fee revenue from the original two ETFs. And you know what? EEM and EFA still have nearly $90 billion in combined assets. Granted, there have been net outflows in these funds over the past several years, but the existing asset base is more than enough to justify their existence. QQQ, by comparison, is still the 5th largest ETF in existence with $184 billion in assets and it still has money flowing in.

Conclusion

While investors will certainly benefit from the existence of a bitcoin ETF, my point is that Grayscale has a financial incentive to keep GBTC just the way it is. Following the iShares and Invesco route of launching a similar lower cost alternative while keeping the original seems perhaps the wiser route to go.

Having both the existing bitcoin trust and a new bitcoin ETF gives Grayscale more in the toolbox and gives the company the opportunity to compete in the bitcoin ETF arena while keeping its huge asset base.

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