Bitcoin (BTC-USD) watchers got huge news today. After years in the making, the ruling is in on a spot Bitcoin ETF. After a false start yesterday when the SEC’s Twitter was hacked, the agency voted to approve Grayscale Investment’s application to convert its ~$27 billion closed-end Bitcoin fund (OTC:GBTC) into an ETF, along with a slew of other providers, including BlackRock and Ark Invest. This ruling means millions of U.S. investors will now be able to buy Bitcoin with the click of a button and with the fee structure of an index fund. Public interest is massive, with the Bitcoin ETF being the top trending topic on Twitter for most of the past few days.
What’s next? The ETFs should begin trading in the morning. Upon conversion, Grayscale’s Bitcoin Trust will redeem shares until it trades at net asset value, finishing the final step in unlocking the billions of dollars in dead money that was trapped inside the fund. The ruling also brings competition to the fund space–new funds are coming onto the market for a fraction of the fees of Grayscale, giving investors who bought low the opportunity and sell high on Grayscale, and swap it out for a low-cost Bitcoin ETF. Worried about deferring taxes? As long as you’ve held for at least 12 months, finance theory strongly supports switching to a lower-cost fund. For holders in GBTC, the past couple of years have been an up-and-down odyssey, but one that ended with a favorable resolution. Bitcoin itself has been ramping up with investor enthusiasm building ahead of the ETF approval and the 2024 halving event, but investors may want to be cautious not to chase the price higher.
Bitcoin ETF Approvals (With Fee Structures):
The SEC approved the ETF applications at once to allow some free market competition on fees, this successfully has prompted market participants to cut fees to attract assets. A price war has developed among ETF issuers, with the latest fee schedules below.
What Do Spot Bitcoin ETFs Mean For Bitcoin Going Forward?
In a vacuum, having spot Bitcoin ETFs creates a clear boost in demand for Bitcoin. The most common question I’ve received over the years about Bitcoin from investors is how they can buy it. The lack of a spot ETF had the effect of suppressing demand from investors, who bought less Bitcoin than they would otherwise or didn’t buy at all because they weren’t comfortable with the options.
Previous options included buying on platforms like Coinbase (with high transaction fees), buying on platforms like BlockFi or Celsius (fortunately, I pulled my deposits out before they collapsed), or the Bitcoin Futures ETF (BITO), which has underperformed Bitcoin by roughly 3.5% annually since inception, likely due to structural issues with trading futures for large size. I believed GBTC was the best way to buy Bitcoin at the time due to the big discount to net asset value, and it seems that this was proven correct. However, as I mentioned before, GBTC already has a lot of assets and their management fees aren’t competitive to buy the fund without a steep discount to NAV. Therefore, I think your best bet is likely going to be to plug your money into the iShares Bitcoin Fund (IBIT) at a 0.12% initial expense ratio. Cathie Wood’s Ark Bitcoin Fund (ARKB) will also be a contender– they’re offering a full waiver on fees for 6 months.
Now, about Bitcoin itself. Everyone and their brother seems to have bought Bitcoin before the ETF approval, and a lot of this hot money is going to look to cash out. This was obvious from the big price swings when the SEC’s Twitter account got hacked yesterday. and If the supply from speculators cashing in exceeds the demand from new investors pumping money into the ETFs, then the price is likely to fall. On the other hand, the supply of Bitcoin is rather limited, so small changes in demand can cause big ramps in price. In a previous piece, I covered how the price of gold is surprisingly correlated to how much of it is being mined at any given time. If this holds true for BTC (and it has historically), 2024 could be a surprisingly good year.
On balance, if you own GBTC, you’re going to want to cash in anyway to move to a lower-fee ETF, so it’s potentially a good time to take profits. I believe that Bitcoin is likely to trade to $100,000+ over time because having an alternative to central bank currencies is super valuable. However, the path to get there is likely to have plenty of twists and turns, so taking some profits after the GTBC conversion is likely prudent, as is dollar-cost averaging into Bitcoin for new investors.
Not sure how much to allocate to Bitcoin? First, allocate whatever you’re comfortable with, not an arbitrary number like 10%. Second, modern portfolio theory suggests that a good starting point is to match the weight of the asset relative to its market value in the investible global financial markets. An approach taken by quant and former risk manager Aaron Brown is to allocate a constant 2% to Bitcoin, buying more when it drops and selling when it rises. He wrote in 2021 that this strategy made him 40% of his total wealth over time with only 2% at risk at any given time. Other investors are more bullish, with Tom Lee calling for Bitcoin to hit $500,000. I don’t foresee 10x returns for Bitcoin in the next few years, but I do see nice value, albeit with more required price sensitivity than the biggest bulls in the market.
Today’s ruling is a watershed moment for Bitcoin. The emergence of spot Bitcoin ETFs creates the infrastructure for millions of investors to adopt Bitcoin as an asset class. If you bought GBTC for the discount, then congrats on the win. You can now consider swapping it for a lower-fee ETF. If you don’t own any Bitcoin, there’s no need to be panic buying now, but consider allocating money over time to the iShares Spot Bitcoin fund for the long-run potential for Bitcoin to serve as a store of wealth outside of central bank control.
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