Two Theories Why GBTC Remains Committed Despite Billions in Losses Due to High Costs
The Grayscale Bitcoin ETF has seen a reduction in value exceeding $14 billion, maintaining high industry fees despite this decline. Jim Bianco, a former Wall Street analyst, has identified two potential reasons for this situation.
An industry analyst suggests that Grayscale might adhere to its high fees for its Bitcoin Exchange-Traded Fund (ETF) to deter shareholders from liquidating their positions, simultaneously betting on the continued upward trajectory of Bitcoin prices. Since its inception on January 11, the Grayscale Bitcoin Trust (GBTC) has experienced daily outflows, totaling over $14 billion by March 25.
Jim Bianco, founder of Bianco Research and a former Wall Street analyst, has pointed to GBTC’s fees as problematic. In a March 25 post, he speculated that at least half of GBTC’s outflows are moving towards lower-fee ETFs. Grayscale’s ETF charges a 1.5% annual management fee, which is significantly higher than the 0.30% average of other Bitcoin ETFs.
Bianco proposed two possible reasons for Grayscale’s fee strategy. Firstly, it might be a bet that GBTC holders are trapped due to financial tax implications analyzed by the asset manager, making it too costly to exit until there’s an urgent need for cash. As of March 25, based on YCharts data, GBTC’s assets under management were close to $24.7 billion.
Additionally, Bianco believes that Grayscale’s insistence on its fee structure might stem from optimism that Bitcoin’s price could surpass $100,000 in the next couple of years. In this scenario, Grayscale bets that Bitcoin’s price increase would offset or fully compensate for any outflows, enhancing the value of the assets under its management for which it charges fees. However, Bianco warned that if BTC’s price falls, this strategy could lead to a disaster, as increased GBTC sales and realizing tax liabilities could prompt holders to leave GBTC and not return.
Expect GBTC to be a constant source of selling until it’s held by those who have forgotten about it, those trapped by massive tax bills upon selling, or the deceased, as per Eric Balchunas, a Bloomberg ETF analyst. Responding to Bianco’s theory that GBTC may never see inflows again, Balchunas speculated that we might witness a few more days of significant outflows before a slow drop to oblivion, assuming BTC’s price rises, allowing for substantial revenue.
The launch of spot Bitcoin ETFs in the United States was influenced by Grayscale winning a legal battle against the Securities and Exchange Commission (SEC) last year, which forced the SEC to review Grayscale’s proposal to convert GBTC into an ETF. Grayscale devoted significant effort to suing the SEC for this conversion, managing it in a way that slowly stemmed the bleeding. Balchunas suggested that Grayscale might have recognized that even if GBTC lost its last investor, the ETF hype would pump Bitcoin enough to offset losses and stabilize its managed assets.
