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In one of my previous articles, I discussed the top Bitcoin ETFs for investors seeking exposure to Bitcoin, excluding the Grayscale Bitcoin Trust (NYSEARCA:GBTC) due to its high management fees. Today, I’ll go into detail about GBTC and explain why I believe it’s an inefficient option for Bitcoin exposure.
Thesis: GBTC’s high expense ratio is unreasonable and will likely hinder the ETF’s performance
The GBTC ETF has an expense ratio of 1.50%. This is more than five times the 0.20% – 0.25% that Bitcoin ETFs such as the iShares Bitcoin Trust ETF (IBIT) are charging. After examining Grayscale’s marketing strategies for this ETF and their attempts to justify the high fee, I have not found any convincing reasons to support this expense ratio.
I believe GBTC’s 1.50% expense ratio will determine the long-term underperformance of this ETF when compared to other ETFs or to Bitcoin itself. Therefore, I see no reason to choose GBTC over any of the other major Bitcoin ETFs, or opting for self-custody.
Grayscale’s reasons for choosing GBTC amount to little more than puffery
According to Grayscale, the objective of GBTC is “to reflect the value of BTC held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities.”.
This objective is all in all very similar to that of the IBIT ETF, that BlackRock states as “[seeking] to reflect generally the performance of the price of bitcoin.”.
The difference between the two ETFs is their expense ratio. While IBIT’s expense ratio is 0.25%, GBTC is charging a hefty 1.50%. The question is: why?
Visiting the “WHY GBTC” section of the GBTC website, Grayscale offers three reasons why investing in their Bitcoin fund:
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Created in 2013, GBTC has the longest operational history as the first publicly-traded Bitcoin fund.
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As GBTC’s sponsor since inception, Grayscale is one of the only asset managers with a decade of experience operating a Bitcoin investment vehicle that is regulated by the U.S. Securities Exchange Commission.
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As an actively traded spot Bitcoin ETF, GBTC offers investors high flexibility to manage their positions.
I believe most of these reasons are puffery claims that can hardly justify choosing this ETF. I wouldn’t recommend one fund over another based solely on a longer history. Especially for a passive fund that invests in one asset, a decade of asset management experience offers no clear advantage over other issuers.
The fact that the fund is actively traded as an ETF does not represent a point of difference whatsoever compared to other ETFs, either.
In my opinion, Grayscale could try to market the ETF’s liquidity as a point of differentiation. At the time of writing, the GBTC ETF still is the largest Bitcoin ETF by size, and it has the lowest bid-ask spread among Bitcoin ETFs, at 0.02%.
While these two elements are still not enough for me to recommend GBTC, at the very least they represent an actual point of difference for this ETF.
Performance will start lagging behind and the ETF will shrink
Bitcoin ETFs have only recently been approved. Performance between ETFs is therefore still comparable, to date. The difference in expense ratio only starts compounding significantly after a few years.
GBTC vs IBIT performance (Seeking Alpha)
Given how GBTC has a 1.50% expense ratio, it is a mathematical certainty that this ETF will underperform against IBIT and other ETFs with expense ratios between 0.10% and 0.25%.
The GBTC ETF has also experienced significant outflows since its conversion to an ETF in January 2024. While the fund has experienced its first day of net asset inflows in April, it has significantly decreased in size since January. I believe it is very likely that GBTC will lose its status as the largest Bitcoin ETFs in the next few weeks.
Why does GBTC exist?
The question, considering how GBTC is marketed, is why it exists in the first place. The answer lies mostly in its history. GBTC was launched in 2013 as one of the very first global investment funds focused on Bitcoin. For years the fund was effectively the only way for investors to access Bitcoin via a traditional brokerage account.
In that context, its high expense ratio was justified given the lack of options. Grayscale was one of the main entities pushing for a Bitcoin ETF. Large part of the reason why Bitcoin ETFs were approved back in January had to do with Grayscale winning a lawsuit against the SEC.
However, after the conversion of GBTC to an ETF, there simply are better, cheaper alternatives available.
It remains to be seen whether Grayscale will act and lower its fees to match those of BlackRock and other issuers. If that were to happen, the GBTC ETF would actually be very competitive in the Bitcoin ETFs market.
Comparison between Bitcoin ETFs, including GBTC (Author’s elaboration of publicly available data)
As shown in my table above, the GBTC ETF enjoys the best average bid-ask spread and (still, to date) the most assets under management.
If Grayscale was interested in making this ETF competitive, it could simply match IBIT’s expense ratio. By doing so, it would become the most liquid Bitcoin ETF on the market, and I would personally recommend it as a top choice to invest in Bitcoin.
Risks to my thesis
In this article, I have analyzed GBTC as a means of gaining exposure to Bitcoin. The primary risk with GBTC is linked to Bitcoin itself, a notably volatile asset currently trading near its all-time highs. While not a direct discussion on investing in Bitcoin, it’s important for investors to understand the risks involved.
Another potential risk is if Grayscale decides to reduce its expense ratio to match those of IBIT and other major Bitcoin ETFs. Should this occur, as I mentioned earlier, GBTC would become a highly attractive ETF for Bitcoin exposure.
Conclusion
The GBTC ETF falls short as a viable option for investing in Bitcoin. GBTC is convenient as an ETF, as it can be purchased via any major brokerage. However, its expense ratio is over five times higher than that of its closest competitors.
If you already have GBTC in your portfolio, it might be wise to wait a few more months to see whether Grayscale has any plans to decrease its expense ratio. For this reason, my final recommendation for GBTC is a “HOLD”.
If you’re considering investing in Bitcoin and don’t currently own GBTC, I recommend avoiding this ETF and opting for one of the major ones instead, such as BlackRock’s IBIT.
