Bitcoin spot ETF is coming. One article analyzes the strength of 11 issuing companies.

Highlights

① Effective dialogue between the SEC and potential issuers , is an important reason for the final approval of the Bitcoin spot ETF.

② 11 Bitcoin spot ETFs (including GBTC) were approved at the same time, thanks to the SEC's absorption of Bitcoin futures ETFs. One ETF in the market only relied on its leadership Lessons learned that a product can capture the vast majority of its market share within three days of launch. Let all prepared issuers compete on the same field, which is fairer and more beneficial to investors.

③ How should investors choose an ETF that suits them? Three metrics: fees, liquidity, and transaction costs. Buy-and-hold investors should focus on fees, active traders should focus especially on liquidity, and all interested parties should focus on how the issuer's own transaction costs ultimately impact ETF performance.

On July 1, 2013, Cameron and Tyler Winklevoss applied to establish the Winklevoss Bitcoin Trust. At the time, it was considered an iconic financial innovation, but the SEC was not ready to approve ETFs that invested in unregulated assets in unregulated markets.

Today, more than a decade later, the Winklevoss brothers’ original vision has become a reality, with the SEC finally agreeing to approve the launch of a Bitcoin spot ETF.

1. History of Bitcoin Spot ETF

Although The Winklevoss Bitcoin Trust originally applied in 2013, but it was not officially rejected by the SEC until 2017. Over the past decade, the U.S. SEC has repeatedly expressed dissatisfaction with the unregulated and potentially fraudulent practices of cryptocurrencies, but this has not stopped relevant issuers from trying to bring Bitcoin spot ETFs to the market.

Grayscale launched the Grayscale Bitcoin Trust (GBTC) as early as 2013. It was initially only open to qualified investors. After the listing in 2015, retail investors Can be traded. Why can GBTC be launched smoothly? Because it is essentially traded on the over-the-counter market, SEC approval is not required (but FINRA approval is required).

As a closed-end trust product, its disadvantage is that the market price may deviate significantly from the underlying net asset value. Although technically, buying it is equivalent to buying Bitcoin (because this trust product directly holds Bitcoin), its price has always been at a premium/discount to Bitcoin’s net asset value (the largest discount in 2021 was once close to 50%). This means that wanting to invest in Bitcoin via GBTC is not very efficient.

As a result, issuers including Bitwise and VanEck have repeatedly tried to launch their own Bitcoin spot ETFs in the past few years.

Things began to change in late 2017, when the CBOE listed the first Bitcoin futures contracts and began trading. Now that these contracts can be successfully launched, investors will look forward to related financial derivatives. In October 2021, the SEC finally approved a Bitcoin futures ETF.

But then, the Bitcoin futures ETF faced the first embarrassing problem: At that time, one ETF ProShares Bitcoin Strategy ETF (BITO) was better than the second ETF The Valkyrie Bitcoin Strategy ETF (BTF) leads the offering by three days.

In the field of ETFs, the first-mover advantage is huge, and the three-day difference caused BITO to attract the attention of most investors. At present, the total investment volume of crypto ETFs is 2.3 billion US dollars, of which more than 1.8 billion have chosen BITO (rather than BTF). The time advantage has helped ProShares become a big winner.

The second problem with the Bitcoin futures ETF is that it cannot perfectly track the actual performance of Bitcoin.

Since the underlying layer of the Bitcoin Futures ETF is a futures contract, switching to the next contract after the expiration of the current contract will incur rollover costs, so the rate of return of the Bitcoin Futures ETF Always lagging behind Bitcoin itself. Just last year, the price of Bitcoin increased by 171%, while BITO gained "only" 151%. A difference of 20% is not a small number.

The following picture is a comparison of the price fluctuations of BITO and Bitcoin (red is BITO, green is Bitcoin):

This is why the Bitcoin spot ETF is very important. If investors are optimistic about Bitcoin, the best choice is of course Bitcoin itself, not derivatives.

In fact, Bitcoin spot ETFs already exist in Canada and Europe, and there are technically no trading problems. Therefore, the US SEC allows them to trade in the United States, the world's largest capital market. Going public is inevitable.

 2.  New changes in the past six months

Before the second half of 2023, the usual path for Bitcoin spot ETF filing is as follows:

• Issuer submits Bitcoin spot ETF application

• Wait patiently

• SEC delays decision on approval

• Continue to wait

• SEC postpones decision again

• Continue to wait

• SEC rejection

The U.S. SEC has always insisted that there is too much fraud and manipulation in the encryption market, so it chose to remain silent and indefinitely shelve the issuer's application. Although some investors believe that "postponing rather than rejecting outright" is not entirely a bad thing, many people have become disappointed after experiencing too much waiting.

It wasn’t until the second half of 2023 that things really changed. The SEC began soliciting comments from issuers, investors and other interested parties and invited issuers to resubmit materials based on feedback. This is an important breakthrough and means that the SEC is actually willing to discuss it rather than ignore it.

In the past month, the US SEC and the issuer have repeatedly argued and requested repeated revisions to relevant documents, which basically resolved all the concerns of the US SEC—— The biggest challenges are oversight (how issuers monitor/address manipulation and fraud) and custody (how bitcoins are stored).

Effective dialogue between the SEC and potential issuers has obviously become an important reason for the final approval of the Bitcoin spot ETF.

As for why January 10th is so important?

Quite simply, this is the approval deadline for the ARK 21Shares Bitcoin ETF (ARKB). ARK is one of the important filers of the Bitcoin spot ETF, and the US SEC needs to decide whether to approve or reject it before January 10.

Why were 11 Bitcoin spot ETFs (including GBTC) approved at the same time on the 10th? Because the SEC learned a lesson from the Bitcoin futures ETF market where an ETF could eat up the vast majority of its share by launching just three days ahead. After all, it is fairer and more beneficial to investors to let all prepared issuers compete on the same field.

3.  Analysis of the prospects, advantages and disadvantages of Bitcoin spot ETF

The bottom layer of the 11 ETFs is Bitcoin. What are their differentiating factors? Which publishing companies will ultimately come out on top? How do investors choose the ETF that’s right for them?

Three important indicators: fees, liquidity and transaction costs. Buy-and-hold investors should focus on fees, active traders should focus especially on liquidity, and all interested parties should focus on how the issuer's own transaction costs ultimately impact ETF performance.

The specific targets and analysis are as follows:

iShares Bitcoin Trust (IBIT), fee rate: 0.25% (0.12% during the reduction period), Excellent prospects

It is the most promising Bitcoin spot ETF. Given BlackRock's massive asset size and client advantage, it's hard to imagine IBIT not succeeding.

And judging by market sentiment, the chances of a Bitcoin spot ETF receiving SEC approval seemed slim before BlackRock announced it was entering the race. It was BlackRock's participation that greatly encouraged market confidence (other parties even speculated that they knew some "secrets"). In terms of news and attention, BlackRock is always the one that gets the most attention.

Fidelity Bitcoin Trust (FBTC), fee rate: 0.25% (0% reduction period), excellent prospects< /p>

If nothing else, Fidelity’s scale advantage is extremely strong. While the company isn't an absolute domination of the ETF space, it has trillions of dollars in assets overall and would certainly recommend crypto investing to existing clients. As an asset management giant, Fidelity’s appeal cannot be underestimated. Therefore, FBTC is expected to eventually become the leading Bitcoin spot ETF product.

ARK 21Shares Bitcoin ETF (ARKB), fee rate: 0.21% (reduction period is 0%), good prospects

Cathie Wood has been involved in the crypto field for many years and holds GBTC through multiple ARK funds. The current position is around $80 million, which may all be transferred to ARKB soon. The Bitcoin ETF certainly fits ARK’s theme of disruptive innovation, and the fee of 0.21% is also very low. Given that ARK typically charges 0.75% on its actively managed funds, it's clear that ARK is working hard to win over the market.

However, after experiencing the dismal performance in 2022, ARK's name is far less resounding than at its peak in 2021. How many investors are willing to trust Cathie Wood again? Let’s wait and see.

Grayscale Bitcoin Trust (GBTC), fee rate: 1.50%, good prospects

GBTC was originally a trust with $27 billion in assets and is transforming from a closed trust. It used to be the “only” investment channel for Bitcoin. Bitcoin futures ETFs pose no real threat, but spot Bitcoin ETFs can, especially from the likes of BlackRock and Fidelity. It now wants to maintain a 1.5% rate (from 2% before conversion) on $27 billion in assets.

GBTC should have a hard time continuing to attract large amounts of new money, the question is how long they can maintain their current scale. Might lose scale with other funds but will undoubtedly bring in huge income for quite some time.

Bitwise Bitcoin ETF Trust (BITB), fee rate: 0.20% (reduction period is 0%), good prospects

Bitwise doesn't appear to be a potential winner when competing against the likes of BlackRock and Fidelity, but BITB could be the dark horse.

As of now, their rates are 0.20%, the lowest in the category, and they also have fee waivers. One small detail in their latest filing is that Bitwise, a crypto-native investment firm, has received a nine-figure investment commitment from Pantera, which has approximately $3.6 billion in assets. There may be more companies interested in working with it.

WisdomTree Bitcoin Trust (BTCW), fee rate: 0.30% (reduction period is 0%), good prospects

WisdomTree is an established player in the ETF market (ranked 9th in total assets). The company has ETFs covering cybersecurity, cloud computing and artificial intelligence, but its roots are in traditional companies. Stocks and bonds. BTCW may attract the attention of established investors.

Invesco Galaxy Bitcoin ETF (BTCO), fee rate: 0.39% (0% reduction period), good prospects< /p>

Invesco has a larger asset management scale than WisdomTree and is well-known enough. Their Nasdaq 100 Index and related ETFs are very attractive and may generate some Spillover Effect.

But its advantages are not very obvious. The fee waiver is a good start, but the 0.39% rate thereafter is completely uncompetitive.

VanEck Bitcoin Trust (HODL) fee: 0.25%, good prospects

VanEck also has assets under management, but not enough to be one of the leaders. Considering that VanEck was one of the first issuers to try to bring a Bitcoin spot ETF to the market, it has some visibility, but basically no advantage in terms of fees.

Valkyrie Bitcoin ETF (BRRR), fee rate: 0.49% (reduction period is 0%), average prospects

Valkyrie is a veteran player in crypto ETFs. Their Bitcoin futures ETF ranks fourth in size. It’s understandable that it hasn’t caught up with BITO, but VanEck and ProShares’ Bitcoin futures ETFs launched later than it and are currently surpassing it in size. This means that its competitive advantage is average and it will be difficult to outperform BlackRock, Fidelity and ARK in the future. Plus, their post-waiver fees are among the highest.

Franklin Bitcoin ETF (EZBC), fee rate: 0.29%, average outlook

As an old-school asset management company, Franklin is better known for its mutual funds than ETFs. Among the Bitcoin spot ETFs, EZBC may be the least recognized.

In 2017, Franklin launched a series of index ETFs in different markets, all with fees set at 0.09%, aiming to rely on a low-price strategy to overtake others in corners. Some have achieved moderate success, but most are still less than $100 million in size, which shows that Franklin has not been able to achieve a breakthrough with low cost. Coupled with the lack of any fee reductions, EZBC has no reason to be optimistic.

Hashdex Bitcoin ETF (DEFI), fee rate: 0.90%, average prospects

Like Bitwise, Hashdex is a native crypto company, which should give them some advantages, but the high fees are an Achilles' heel. And they are not well known among ordinary investors.

4.  Conclusion

We will soon know who wins the issuer race. But clearly, investors are the biggest winners.

The previously leading Bitcoin futures ETF, BITO, has a fee rate of 0.95%, so many people expect the spot ETF fee rate to be at least 0.50%. Now, fierce competition has led to fee rates reaching as low as 0.20%, and even short-term 0 fees. The influx of tens of billions of dollars of new funds into related markets is just around the corner.