Summary
The introduction of Bitcoin spot ETFs on Jan. 11 added a new class of products for investors looking for exposure to Bitcoin. We recommend that holders of existing Bitcoin ETFs (GBTC and BITO) consider selling their positions. Most investors should move to iShares or Fidelity ETFs, with Bitwise also being a reasonable alternative.
Bitcoin ETFs before 2024
The first application to launch a Bitcoin ETF was filed with the SEC in 2013 by the Winklevoss twins of the Social Network fame who were early investors in bitcoin. The application was denied. The SEC has fought tooth and nail to block any and all spot ETFs for a decade. Only in 2024, after multiple setbacks in courts, the SEC conceded defeat and approved spot ETFs, issuing a rather ungracious statement that highlighted the reluctance of their surrender.
Before 2024, US investors who wanted to access Bitcoin through their brokerage accounts were limited to two products: GBTC and BITO. Each of those had problems.
GBTC (Grayscale Bitcoin Investment Trust) was launched in 2013 as a private trust. It was listed over-the-counter (OTC) in 2020, becoming the first publicly traded Bitcoin fund in the US. The lack of alternatives to GBTC led to strong demand for the fund, driving its NAV premium to over 100% at one point. A number of crypto hedge funds participated in a popular GBTC trade: buy bitcoin on crypto exchanges, deliver it to GBTC, and receive GBTC shares worth 2x as much, subject to a 6 month lock-up. It worked great until it didn’t and a number of hedge funds (notably Three Arrows Capital and FTX-linked Alameda Research) collapsed when the NAV premium disappeared and bitcoin sold off.
In 2021, the SEC approved BITO, a futures-based ETF. BITO accumulated $1 bn in assets within days, marking the most successful ETF launch in history. The existence of BITO as an alternative led to the disappearance of the GBTC premium to NAV. Indirectly, it led to the collapse of Three Arrows and FTX.
Both GBTC and BITO are expensive, with annual management fees of 2% (GBTC) and 0.95% (BITO). They also didn’t track Bitcoin perfectly. GBTC, especially, delivered performance quite different from that of owning Bitcoin, due to wide swings in its premium and discount to NAV. BITO, in turn, suffered from the costs of rolling the futures monthly, which led to 4% annualized underperformance compared to holding Bitcoin directly.
Spot ETFs
Launched in January 2024, the new crop of spot ETFs are better products for most investors. Firstly, because their management fees are much smaller and second, because they promise to be better at tracking Bitcoin price.
Spot ETFs tend to be winner-take-all markets. The biggest ETFs can afford to cut their fees, attracting more inflows. They are also more likely to spawn active option markets, which attract even more investors, in a virtuous cycle that leads to long-term market domination by early leaders. An example of this phenomenon is the SPY ETF which tracks the S&P 500 index. It was the first successful index-tracking ETF and continues to dominate the market, despite vigorous efforts by competitors like iShares (IVV) and Vanguard (VOO). A whole ecosystem of options and other derivatives sprung up around it, keeping it ahead of the pack for decades.
Small ETFs (those with $100m or less in assets) usually shut down after a while because their sponsors cannot cover the fixed costs of running an ETF while remaining competitive on fees. It is, therefore, wise to avoid small ETFs that may not be around for long.
Current Bitcoin ETFs
Bitcoin ETFs (data as of Jan. 30, 2024)
| Ticker | Name | AUM ($m) | Fee (%) |
| GBTC | Grayscale Bitcoin Trust BTC | 21,406.9 | 1.5 |
| IBIT | iShares Bitcoin Trust | 2,473.1 | 0.25 |
| FBTC | Fidelity Wise Origin Bitcoin ETF | 2,226.8 | 0.25 |
| BITO | ProShares Bitcoin Strategy ETF | 2,018.3 | 0.95 |
| ARKB | ARK 21Shares Bitcoin ETF | 645.0 | 0.21 |
| BITB | Bitwise Bitcoin ETF | 612.3 | 0.2 |
| BTCO | Invesco Galaxy Bitcoin ETF | 301.1 | 0.25 |
| HODL | VanEck Bitcoin Trust | 128.3 | 0.25 |
| BRRR | Valkyrie Bitcoin Fund | 114.9 | 0.25 |
| EZBC | Franklin Bitcoin ETF | 59.4 | 0.19 |
| BTCW | WisdomTree Bitcoin Fund | 9.3 | 0.3 |
GBTC
GBTC remains the biggest Bitcoin ETFs but it is suffering from large outflows. Its fees are the highest, despite being cut on Jan. 11. The managers seem to be betting that a large number of clients will remain, either because of inertia or because they don’t want to pay capital gains taxes on a sale. We think that GBTC will continue to shrink and recommend against buying it.
iShares and Fidelity
Both gathered over $2 bn in assets and offer low fees (25 basis points). They are likely to be long-term winners and there is not much to differentiate them. We recommend both for clients.
However, Fidelity has a history of being friendly and open to crypto. This may tip the balance for clients who prefer to give their business to providers who didn’t spend the last ten years attacking crypto and crypto investors, like BlackRock’s Larry Fink (BlackRock is the owner of iShares).
BITO
In the world where spot ETFs exist, there is not much rationale for using a futures ETF, especially one with higher fees. The only point of differentiation for BITO is that it doesn’t hold custody of physical bitcoin, and clients thus do not have to worry about the risk of the ETF sponsor getting hacked or losing the passwords to their Bitcoin wallets. This risk is real (witness Prime Trust bankruptcy in Nevada). Other ETFs are relying on crypto custodians (mostly Coinbase) to take care of the problem. Coinbase has never had its wallets hacked or compromised but there is no guarantee that determined hackers will never succeed in defeating Coinbase’s security. Clients who are sensitive to this risk may want to stick with BITO despite its higher fees.
Bitwise
At $600m in assets, Bitwise is lagging iShares and Fidelity in the race to raise assets, but it is big enough that the sponsor will likely keep it going. At 20 bps, Bitwise is slightly cheaper than both of them. For investors who want to support Bitcoin, Bitwise’s selling point is its pledge to donate 10% of profits to Bitcoin open-source development.
Other Funds
There is not much point in looking at the other ETFs.
Only ARK is big enough to stay in the game, and it doesn’t offer much differentiation compared to Bitwise. The ARK family of funds have taken extreme bets on the continuance of the current bull market in technology stocks. When that bull market ends, ARK may not survive and their bitcoin ETF could become collateral damage.
The rest of the spot ETFs are small and likely to stay small.