Fee race: BTC ETFs from 2.5% to 0% in days, not years
In this post, I look at the BTC ETFs' inflows/outflows and the fee race to 0%, followed by a prediction about indexing. I then summarize the recent media coverage for Grayscale, WisdomTree, Ark/21Shares, BlackRock from the Financial Times, Blockworks, K33 and ByteTree.
Grayscale problems
Grayscale’s private fund GBTC charged a 2.5% management fee for years. Investors didn’t mind paying the high fees when the alternative was to store your own keys — the convenience, tax, and accessibility were well worth more than the management fee, so the billions of dollars flooded into GBTC. It was a unique product. Then ten BTC ETFs got approved and listed, with fees at 0.19% to 0.25% well below Grayscale’s 1.5% and some of them set the fee to 0% during the initial period of a few months. We all knew fees would compress from high to low, but we were all surprised how quickly this unfolded.
With $20 billion in assets under management (AUM) this fee battle left Grayscale with a choice to either lower fees to protect AUM, or to keep the high fee and hope people don’t sell it. They chose the latter. A 1% fee decrease would result in $200 million revenue drop annually. A drop in AUM from $20B to $10B would result in a $150 million revenue loss given a 1.5% management fee. Both are bad. The worst scenario, though, is that AUM drops first followed by a fee decrease to stop the outflows.
The first day of trading inflows amounted to BTC 20,000 ≈ $860M and investors didn’ sell GBTC. On the second day and onward, the selling of Grayscale’s GBTC took off.
Fees are higher in crypto ETPs and ETFs than traditional assets due to many factors, including high historical returns (who cares about 1% or 2% in fees when the returns are +100%) and higher costs (custody is vital for a bearer asset like BTC, not for a registered asset like a share). While a 20 bps fee product can be profitable for an equity ETF with billions or trillions in AUM, a 0.20% fee means an unprofitable BTC ETF. In addition, the AUM tends to be lower for crypto ETFs, as investors allocate a larger fraction of their wealth to stocks and bonds than alternative assets.
Trillion-dollar asset mangers like Franklin Templeton and Fidelity have the financial muscles to lose money on their BTC ETFs. They can fight for a long time. Their bet on currently unprofitable products signals they’re bullish on the future profitability of crypto ETFs. If there’s one thing these suits are decent at, it is calculating the Net Present Value =NPV. Clearly the cashflows year 0, 1, 2 are deeply negative. Thus, the cash flows farther out must be fat. The fact so many big asset managers bet so hard on their BTC ETFs is bullish news for an index provider like Vinter.
My prediction
I have laid out the following prediction for years now:
- first a BTC ETF,
- then many BTC ETS,
- followed by fee compression,
- and later on ETH ETFs,
- followed by index products.
I was correct about the steps (1–3 are now completed). I was wrong about how fast it would happen. I thought it would take months or years to go from the first BTC ETF listings to a blood bath on fees, but it all unfolded in a few days (ketchup effect?).
It is not sustainable to compete on low fees. It is sustainable to compete on differentiated products. With all the time, money, and people who are invested in crypto at these trillion-dollar asset managers after a few years of struggling to create sustainable product lines for single-asset ETFs like BTC and ETH, most of them will continue to push through and in that find index-linked crypto ETFs to be the holy grail—as it was for stocks. History often rhymes. Why does indexing make sense for issuers? The way to space the fee race to zero is to offer innovative index products. While ETFs tracking BTC and ETH are no different from issuer to issuer, an index can be unique.
Enough of ramblings from me. Here is a compilation of what other people are saying.
Financial Times: Bitcoin ETF fee war spreads to Europe
Financial Times · by Jessica Tasman-Jones · January 23, 2024
Invesco and WisdomTree reduce fees on European-listed ETPs by more than 60%
Ark Investment Management had indicated it would price its US ETF at 0.8 per cent but instead launched with no fees for the first six months or until assets reach $1bn (€920m). After that it will charge 0.21 per cent.
BlackRock investors will pay 0.25 per cent for its product, although early investors can access it at 0.12 per cent for the first year until assets reach $5bn.
Ark Investment Management had indicated it would price its US ETF at 0.8 per cent but instead launched with no fees for the first six months or until assets reach $1bn (€920m). After that it will charge 0.21 per cent.
Fees on the $325mn WisdomTree Physical Bitcoin ETP will fall from 0.95 per cent to 0.35 per cent, while fees on the $137mn Invesco Physical Bitcoin ETP will drop from 0.99 per cent to 0.39 per cent.
Massive ETF launch — Lackluster price action
k33.com · January 17, 2024
In its first three trading days, BlackRock’s iShares and Fidelity’s Wise Origin BTC ETFs amassed inflows of $710m (16,382 BTC) and $524m (12,132 BTC) respectively, after solid inflows. Grayscale, on the other hand, has seen outflows of $1.173bn after massive rotation out from Grayscale and profit realization as discussed above. We expect large structural flows from GBTC to other issuers to continue due to GBTC’s substantial fees compared to its peers.
Globally, Bitcoin ETPs hold 864,719 BTC — roughly 45% of the size of crypto exchange reserves. After last week’s GBTC conversion, U.S. ETFs represent 80% of the global BTC ETP balances. … 4.4% of the circulating bitcoin supply is currently held in BTC ETPs globally, a number we expect to increase in 2024.
As GBTC outflows continue, will the largest bitcoin ETF be dethroned?
The Grayscale Bitcoin Trust ETF (GBTC) saw $515 million in net outflows on Tuesday, according to Bloomberg Intelligence data — bringing its net outflow total to nearly $4 billion since converting to an ETF on Jan. 11.
Most customers who bought GBTC in the past would realize a profit upon selling the shares, thereby initiating the taxable event, Greco explained.
“Consequently, even if these customers were to transfer their funds to a more cost-effective ETF, they would do so with a reduced amount of BTC, making the transfer less favorable,” Greco added.
The capital gains grow smaller as bitcoin’s price keeps dropping, Armour said, making it easier for investors to switch. Bitcoin (BTC) was at roughly $39,800 at 3:30 pm ET on Wednesday — down 6.6% in the last week but up 1.3% over the last 24 hours.
“A declining bitcoin is extra bad for GBTC,” Armour said.
ETFs and Musical Chairs
The nine new US spot Bitcoin ETFs are two weeks old. They have seen an almighty $5.56 billion of inflows. Unfortunately, there was leakage on the other side, with $4.93 billion of outflows, leaving net inflows of approximately $621 million.
Most of the new money went into iShares and Fidelity, with our partner, ARK 21 Shares, coming in a respectable third place. These funds are all charging low (0.12%) or even zero fees as a promotion. As for the outflows, it is unsurprising to see Grayscale (GBTC) see $4.37 billion of outflows, given it has been charging 2.5% since 2013 and still charging 1.5% today. As a result, I would expect those $500 million daily outflows to continue. The futures ETF (BITO) also lost $123m of assets. I have plotted the net flows each day with the price of bitcoin overlaid.
What the market hasn’t talked much about is the impact on European and Canadian ETFs, which have seen their assets switched to the new lower-fee US ETFs. In aggregate, this amounts to outflows of $450m, with $123 million from Europe’s largest ETF, BTCE, which charges 2%
…funds hold 908k BTC out of a total of 19.6 million, it is by far the largest measurable investor group. Besides, we know from 20 years of observation how important gold ETF flows were to the gold price, and the same rules apply to bitcoin today.
While the recent net inflows relating to the US ETF launches have been slightly underwhelming, it’s important to remember that people consciously invested or reinvested $5.56 billion into bitcoin ETFs, which is huge.
