Grayscale Bitcoin Trust: AUM Flight Says It All (NYSEARCA:GBTC) (2024)

It has been roughly four months since I last covered the Grayscale Bitcoin Trust (NYSEARCA:GBTC) for Seeking Alpha. At that time, I was bullish, though I did mention the fact that I was decreasing my position in the fund:

I've minimized my exposure to GBTC, in part because the NAV window has closed considerably, and also because I think BTC will go through some consolidation before it takes another leg higher.

No such consolidation happened, and we've essentially seen GBTC shares continue to grind higher as the Bitcoin (BTC-USD) underlying the fund's shares have increased in market value each of the last four months. That said, quite a bit has happened in the Bitcoin investment market in the months since my last article. In addition to GBTC's successful conversion from a closed-end fund to a spot ETF, the Securities and Exchange Commission approved nearly a dozen additional spot Bitcoin ETFs for the United States.

In this update, I'll detail why I've traded out of GBTC entirely and why I now view the fund as one of the worst spot BTC products investors can buy in the US market.

The Fee Flight

Prior to the fund's conversion to a spot ETF, the management fee on GBTC was 2%. For a fund that is not actively managed in any meaningful way, 2% annually to have the exposure to BTC in a traditional investment account was always viewed as high by participants in the market. Even the ProShares Bitcoin Strategy ETF (BITO), which relies on repeatedly rolling over futures contracts each month, charges less than 1%.

However, given the lack of competitive products in the US holding actual BTC in custody, investors didn't have many options other than simply bearing Grayscale's high cost or looking at the highly volatile mining stocks. The days of minimal competition for investment capital are over:

Source: IntoTheBlock

With the emergence of so many other spot BTC ETFs in the US, there is now real competition for AUM, and GBTC is clearly the outlier in the table above. Even after having reduced the fee by 50 basis points, Grayscale's 1.5% annual take on the fund is still highly uncompetitive, and the BTC outflow from the GBTC product proves it.

At $28.6 billion, Grayscale's dollar-denominated AUM figure is still holding up very well, but BTC-adjusted AUM is in free-fall:

Source: Bitcoin Treasuries, as of 3/11/24

The total BTC holdings backing GBTC shares are now slightly above 400k BTC. This is down over 35% from the 619k BTC in the fund from the session preceding spot ETF conversion approval.

Not every spot BTC ETF is seeing the kind of inflow that we're seeing in funds like IBIT or FBTC, but none of them are dealing with the level of outflow that GBTC is experiencing. Since mid-January, Grayscale's flagship fund has seen close to or above a half billion dollars in single-day outflow nine times. Furthermore, GBTC has gone from the fund with the largest share of volume flow to third place in volume market share:

During most of January, GBTC volume share was between 50-60% of all funds. That figure fell below 20% on March 8th and was behind both IBIT and FBTC despite still being a larger fund than the other two combined.

Fund Performance

GBTC shares somewhat notoriously traded at a massive discount for much of the last two years. Even at the time of the fund's ETF conversion, the shares were trading at a discount - though much smaller than pre-conversion. That discount window has since closed and the fund shares occasionally trade a slight premium to NAV:

Given the fact that GBTC shares still traded at a discount immediately following the fund's conversion, the total return for GBTC shares compared with the next three largest funds from launch has actually favored GBTC in spite of the high expense ratio:

But in my view, this outperformance is more a product of the fund's discount in mid-January simply normalizing, rather than the Bitcoin underlying GBTC shares somehow being better than the Bitcoin in the other funds. I suspect this outperformance for GBTC over the last two months will be relatively brief, and the fund shares will lag peers from here over the long haul, provided Grayscale doesn't reduce fees in line with the rest of the market.

Investment Risks

For those who want simple exposure to Bitcoin in a traditional brokerage, GBTC will work fine. If investors believe that Bitcoin is on its way to a six-figure price tag, then the 1.5% fee is unlikely to really be felt to a significant degree. That said, there are a lot of risks in longing Bitcoin and Bitcoin-proxies like GBTC. Bitcoin is designed to be held directly on-chain. If you don't have a seed phrase, you don't actually own the Bitcoin. In addition to Grayscale, GBTC also exposes investors to third-party risk via Coinbase (COIN) which custodies the AUM. Not every spot ETF is structured this way. There's also market cycle risk. The 2024 halving cycle is a real-time reminder that past performance is not indicative of future returns:

We already have a new all-time high in Bitcoin for this halving cycle, and the halving hasn't actually happened yet. This is the first time in Bitcoin's history that this is the case. It is possible, if not likely, that the rest of this cycle will bring surprises as well and some of the lofty price targets we've seen in recent forecasts may not actually come to fruition.

Summary

Even though I think GBTC is arguably the worst spot Bitcoin ETF in the market at this point, I'm not going to call it a sell because I believe investors who do sit in the fund long term will see gains in line with Bitcoin. Since the fund's shares are now redeemable, the possibility of the steep discounts that we saw for much of 2022 and 2023 are unlikely to happen again in my view. But strictly as a way to buy Bitcoin in a traditional investment account, GBTC will work. For me, there are much better options that both offer lower fees and minimize third-party risk. I now rate GBTC a hold because of those fees.

Mike Fay