_{BITCOIN ETF - Fee War Erupts}

We are now at the final stretch of the Bitcoin ETF race. As Bloomberg’s analysts James Seyffart and Eric Balchunas have been telling us for sometime, the SEC wants to approve multiple ETFs at once so they are not seen to be playing ‘King Maker”.

We have seen evidence of this multiple times in the last 10 days as leaked reports of private deadlines were corroborated by all ETF applicants submitting updates within hours of each other to comply with the SEC.

ETFs are a ‘winner takes most’ game because they compete primarily on price and liquidity. Liquidity begets more liquidity, giving the ETF issuer the scale to offer lower feees, which again bring in more customer volume. So the first to reach scale will most likely dominate the landscape for decades as the biggest ETF.

^{How much is that worth?}

Grayscale’s Bitcoin Trust was about $43b in size at its peak and current around $27b.

Assuming the largest Bitcoin ETF reaches $50b, whether in 1 year or 5. A fee of 0.25% will generate $125m in revenue a year - every year, potentially for decades.

This is why we are seeing such an aggressive low-fee launch. Bloomberg’s Seyffart says they may go even lower still.

Accompanying these low fees will be aggressive marketing campaigns to both institutional and retail customers. We have already seen VanEck, Hashdex and Bitwise launch clever Bitcoin ads in support of their ETFs.

BlackRock, Fidelity, Franklin Templeton are the giants of the investment world with trillions of assets under management. Their distribution channels will give them a significant advantage in the race.

Grayscale already has $27b in its Bitcoin Trust, which it is converting into an ETF. It’s difficult to imagine any of the ETF applicants coming close to Grayscale’s ETF in AUM within 12 months, if ever, unless…

1. There is a huge stamped out of Grayscale’s Bitcoin ETF because of their higher fees (more on that shortly).

2. One of BlackRock, Fidelity or Franklin Templeton generate demand beyond all expectations.

My expectation is that we will see a bit of 1 & 2, but not enough to challenge Grayscale’s lead.

Just to put this into historical context of ALL ETFs: BlackRock reportedly has a $2b commitment to its Bitcoin ETF. If this is true, it would be a record for a new ETF launch, according to Bloomberg’s Eric Balchunas.

That’s the task ahead of every challenger to Grayscale.

FEES

Two big surprised emerged from this morning’s updated S-1 filings:

1. The fees were generally much lower than expected with 1 exception.

2. Grayscale’s are much higher than expected.

How this plays out is unknown because there really isn’t much differentiating any of the non-Grayscale ETFs at the moment, so they are competing on price.

Grayscale has deep liquidity with $27b, so it may be able to offer better pricing and certainty for big allocators to get in and out with little price impact above spot (spread/margin). But is that worth 3-5x the cost?

Grayscale has certainly modelled the scenarios to consider:

1. How much are they likely to lose regardless of fee.

2. How much of the $27b AUM will be price sensitive at different fee levels.

3. How much value does their ETF’s liquidity give investors?

4. How much fee revenue do they stand to lose under those scenarios?

5. Cost vs Benefit

Investors now have a clear choice:

1. Grayscale for the liquidity.

2. One of the others because it’s the cheapest.

WHAT HAPPENS NEXT?

Today (Monday the 8th) was the deadline for S-1 submissions. Now the SEC will vote on them in the next few days.

The overwhelming consensus is this is a done deal. Even the ex-SEC Chairman said “there is nothing left to decide”

CNBC’s Kate Rooney already reporting that multiple ETFs are expected to be approved by Wednesday and could be trading LIVE by Friday.

Is this really a big deal?
Yes, unambiguously it is a huge deal. How big is anybody’s guess, but global bank Standard Chartered just put out a note that said up to $100 billion could flow into Bitcoin ETFs in 2024, with a price target of $200,000.

Anything is possible.

This would be an incredible result. For context SPDR S&P 500 ETF Trust (SPY) was the world's largest ETF, with $493.3 billion assets under management (AUM).

Thank you for reading.

My goal for 2024 is to write the best Bitcoin Newsletter.
Pls share this newsletter if you enjoyed reading it.

Cheers,
Archie