ETFs
Does the Grayscale Bitcoin ETF Still Make Sense for New Crypto Investors?
Find out why the Grayscale Bitcoin ETF may no longer be the best option — and why you might want to hold it anyway.
Once upon a time, the Bitcoin Trust in Grayscale (GBTC -0.89%) was trading at a constant premium to its net asset value (NAV)Since the fund’s public market debut in May 2015 through the end of 2020, the Grayscale fund has averaged a 37% price premium to its pure equity holdings. Bitcoin (Bitcoin -0.70%).
Early Bitcoin fans Investors appreciated the availability of the Grayscale fund in regular stock accounts. The mutual fund structure also provided some peace of mind for investors unfamiliar with the new cryptocurrency market.
How the Grayscale Bitcoin Trust Lost Its Bounty
But times have changed. The Grayscale fund’s price premium began to fade in 2021, as Bitcoin prices soared during the third halving cycle and financial firms began to consider the most efficient exchange-traded fund (ETF) format for their cryptocurrency vehicles.
The premium quickly evaporated and turned into a deep discount, peaking at 49% near the end of 2022. I bought Grayscale Bitcoin Trust shares in my individual retirement account (IRA) that summer, which netted me an average discount of 25%. But I missed the ideal buying window by several months.
If you had invested $1,000 in Bitcoin at the very end of 2022, you would have about $3,500 in that crypto account today. The same investment in the Grayscale fund would have ballooned to $6,200 by now:
Not bad for a year and a half of market action.
Bitcoin ETFs Are a Game Changer
But you can’t play the NAV arbitration Grayscale’s fund is no longer of interest. The Securities and Exchange Commission approved 11 applications to create an ETF based on up-to-the-minute Bitcoin prices in January 2024, and Grayscale was on the list. The mutual fund was converted to a full-fledged ETF on January 12, giving fund managers access to a new set of financial tools.
Nowadays, the renowned Grayscale Bitcoin ETF Trades are at a fraction of a percent of the actual price of Bitcoin. The price remains accurate throughout each market day, which is from 9:30 a.m. to 4 p.m. (Eastern Time) on non-holiday weekdays. But Bitcoin continues to trade and change its effective price while Wall Street markets are closed, including weekends, holidays, and in the middle of the night. So the ETF price resets every morning, Monday through Friday (excluding holidays).
There are a few exceptions to the Grayscale Bitcoin ETF’s price accuracy, but the deviations are generally quite small and don’t last long. In the long run, there’s no practical difference between owning a Bitcoin Spot ETF or to create a direct stake in Bitcoin.
Apart from management fees, of course.
Another exception to the rule, I promise!
ETFs are always accompanied by a annual subscriptionSome fund managers call this a management fee, others prefer the term “expense ratio,” and a few refer to it as an operating expense, among other names. In all cases, the fund deducts a small percentage of the value of your portfolio each year to cover the administrative fees, management fees, and other operational costs required to run the fund. This is also how the fund is able to generate a profit for its management company.
The industry leader iShares Bitcoin Trust Fund (I BITE -0.73%) is currently the standard for spot Bitcoin ETFs, charging an annual referral fee of 0.25%. Even this modest fee is partially waived for the first 12 months in order to attract more investors in the early stages. Bitcoin ETF at the Bit Level (BITB -0.74%) drops even further, offering the lowest annual fee of 0.2%. Bitwise’s six-month fee waiver has already expired.
Grayscale stands out from these low-cost ETF options, and not in a good way. Under the mutual fund structure, its total expense ratio was 2% per year, and Grayscale has only reduced that to 1.5% in the ETF era. That’s by far the highest expense ratio of the 11 approved options.
The Long-Term Impact of Deceptively Low Tuition Fees
What difference can these fees make in the long run? Maybe more than you think.
Let’s say you invest $10,000 in an ETF like the Grayscale Bitcoin ETF, and the fund matches the S&P 500 (SNPINDEX: ^GSPC) index long-term average annual return of about 10% for the next 30 years. With an expense ratio of 0.25%, you’ll end up with $162,981 in your pocket.
If you change the expense ratio to 1.5%, your net return drops to $115,583. That’s 29% less than the low-fee option. Those seemingly small fees make a serious difference over the long term. It’s easy to overlook this effect amid the noise of Bitcoin’s potentially huge gains, but a difference of nearly 30% still adds up over 30 years, even for much higher annual returns.
It’s not surprising Jack Bogle, founder of Vanguard was considered an investing genius for insisting on microscopic ETF fees.
Finding the Right Bitcoin ETF for You
So I wouldn’t recommend buying Grayscale’s Bitcoin ETF until the company significantly reduces its expense ratio. It’s pretty easy to opt for lower expense ratios among the other 10 Bitcoin ETF are offered today, including the previously mentioned Bitwise and iShares alternatives. These are my recommendations today if you are looking for Bitcoin exposure in the convenient ETF format.
Why, then, do I still own shares of the Grayscale Bitcoin ETF? Because I’d rather absorb the relatively low expenses until further notice than lock in a large tax liability for converting that position to a lower-fee option. This particular holding is in a standard brokerage account without the tax-sheltering features of my IRA account. A small management fee is less of a liability than a high tax bill, at least in the short term. I just hope Grayscale eventually comes to its senses and reduces that expense ratio.