Bitcoin
Does Grayscale’s Bitcoin ETF Still Make Sense for New Crypto Investors?
Learn why the Grayscale Bitcoin ETF may no longer be the best option — and why you might want to hold on to it anyway.
Once upon a time, the Grayscale Bitcoin Background (GBTC -0.84%) was trading at a consistent premium to its net asset value (NAV). Since the fund’s entry into the public market in May 2015 through the end of 2020, the Grayscale fund has had an average price premium of 37% over its pure asset holdings. Bitcoin (BTC -0.37%).
Early Bitcoin Adherents appreciated the Grayscale fund’s availability in regular exchange 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 Prize
But times have changed. The Grayscale fund’s price premium began to disappear in 2021 as Bitcoin prices surged in the third halving cycle and financial firms began to think about the most effective exchange-traded fund (ETF) format for their crypto vehicles.
The premium quickly evaporated and turned into a significant discount, peaking at 49% near the end of 2022. I bought some shares of the Grayscale Bitcoin Trust in my individual retirement account (IRA) that summer, locking in an average discount of 25%. But I missed the ideal buying window by several months.
If you invested $1,000 in Bitcoin at the end of 2022, you would have approximately $3,500 in that crypto account today. The same investment in the Grayscale fund would have grown to a $6,200 stake now:
Not bad for a year and a half of market action.
Bitcoin ETFs have changed the game
But you can’t touch the NAV arbitration Grayscale Funds are playing more. The Securities and Exchange Commission approved 11 applications to launch an ETF based on Bitcoin prices updated in January 2024, and Grayscale was on the list. The mutual fund was converted to a proper ETF on January 12, giving fund managers access to a new set of financial tools.
Nowadays, the renowned Grayscale Bitcoin ETF trades within a fraction of a percent of Bitcoin’s actual price. The price remains accurate throughout each market day, that is, from 9:30 a.m. to 4:00 p.m. Eastern Time on non-holiday business days. But Bitcoin continues to trade and change its effective price while Wall Street markets are closed, including on weekends, holidays, and in the middle of the night. Therefore, the ETF price resets every morning, Monday through Friday (excluding market holidays).
There are some exceptions to the Grayscale Bitcoin ETF’s price accuracy, but the discrepancies are usually quite small and don’t last long. In the long run, there is no practical difference between owning a Bitcoin ETF in Spot or build a direct stake in Bitcoin.
Except for the management fees, of course.
Just one more exception to the rule, I promise!
ETFs always come with a annual fee. Some fund managers call this a management fee, others prefer the term “expense ratio,” and some present it as an operating expense — among other names. Either way, the fund deducts a small percentage of your holdings each year to cover administrative costs, management expenses, and other operating fees required to maintain the fund. This is also how the fund can generate profit for its management company.
The industry leader iShares Bitcoin Investment Fund (I BITE -0.88%) currently sets the standard for spot Bitcoin ETFs, charging an annual sponsorship fee of 0.25%. Even this modest fee is partially waived for the first 12 months to attract more early investors. Bitwise Bitcoin ETF (BITB -0.95%) drops further, offering the lowest annual rate of 0.2%. Bitwise’s six-month fee waiver has now 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 only reduced it to 1.5% in the ETF era. It’s by far the highest expense ratio among the 11 approved options.
The Long-Term Impact of Deceptively Small Fees
How much of a difference can this fee 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 Index (SNPINDEX: ^GSPC) indexes long-term average annual return of approximately 10% for the next 30 years. With an expense ratio of 0.25%, you’ll end up with $162,981 in your pocket.
Change the commission rate to 1.5%, and your net return drops to $115,583. That’s 29% below the low-fee option. These seemingly modest fees make a big difference in the long run. It’s easy to overlook this effect amid the noise of Bitcoin’s potentially huge gains, but a nearly 30% difference remains in the 30-year calculation, even for much larger annual returns.
It’s no wonder Vanguard Founder Jack Bogle was considered an investment 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 lowers its expense ratio much further. It’s easy enough to go with the lower expense ratios of one of the other 10 spots Bitcoin ETFs on offer today, including the previously mentioned Bitwise and iShares alternatives. Those would be my recommendations today if you’re looking for some Bitcoin exposure in the convenient ETF format.
So why do I still own some shares of the Grayscale Bitcoin ETF? Because I would rather absorb the relatively light expenses until further notice than lock in a large tax bill to convert that position to a lower-fee option. That particular holding sits in a standard brokerage account without the tax-sheltered features of my IRA account. A small management fee hurts less than a large tax bill, at least in the short term. I can only hope that Grayscale eventually comes to its senses and lowers this fee.