Once upon a time, the Grayscale Bitcoin Trust (GBTC -1.16%) traded at a consistent premium to its net asset value (NAV). From the fund's public market entrance in May 2015 to the end of 2020, the Grayscale fund averaged a 37% price premium over its holdings in pure Bitcoin (BTC 0.86%).
Early Bitcoin adopters appreciated the Grayscale fund's availability in ordinary stock-exchange accounts. The mutual fund structure also provided some peace of mind to investors unfamiliar with the newfangled cryptocurrency market.
How the Grayscale Bitcoin Trust lost its premium
But times have changed. The Grayscale fund's price premium started to fade in 2021 as Bitcoin prices soared in the third halving cycle and financial firms started thinking about the more effective exchange-traded fund (ETF) format for their cryptocurrency vehicles.
The premium evaporated quickly and turned into a significant discount instead, maxing out at a 49% rebate near the end of 2022. I picked up some Grayscale Bitcoin Trust shares in my individual retirement account (IRA) that summer, locking in an average discount of 25%. But I missed the ideal buying window by several months.
If you invested $1,000 in Bitcoin at the very end of 2022, you'd have roughly $3,500 in that crypto account today. The same investment in the Grayscale fund would have ballooned into a $6,200 holding by now:
That's not too shabby for a year and a half of market action.
Bitcoin ETFs changed the game
But you can't play the NAV arbitrage game with the Grayscale fund anymore. The Securities and Exchange Commission approved 11 applications to start an ETF based on up-to-the-minute Bitcoin prices in January 2024, and Grayscale was on the list. The mutual fund was converted into a proper ETF on Jan. 12, giving fund managers access to a new set of financial tools.
These days, the renamed Grayscale Bitcoin ETF trades within a fraction of a percent of the true Bitcoin price. The price stays accurate throughout each market day, meaning 9:30 a.m. to 4 p.m. (Eastern time) on non-holiday weekdays. But Bitcoin keeps trading and changing its effective price while Wall Street's markets are closed, including on weekends, holidays, and the middle of the night. So, the ETF's price is reset every morning, Monday to Friday (except on market holidays).
There are some exceptions to the Grayscale Bitcoin ETF's price accuracy, but the discrepancies are usually fairly small and don't last long. In the long run, there's no practical difference between owning a spot Bitcoin ETF or building a direct Bitcoin holding.
Except for management fees, of course
Just one more exception to the rule, I promise!
ETFs always come with an annual fee. Some fund managers call it a management fee, others prefer the term "expense ratio," and a few present this cost as an operating expense -- among other names. Either way, the fund deducts a small percentage of your holding's value every year to cover administrative costs, management expenses, and other operational fees necessary to maintain the fund. This is also how the fund can turn a profit for its management firm.
The sector-leading iShares Bitcoin Trust (IBIT -1.14%) currently sets the standard for spot Bitcoin ETFs, charging an annual sponsor fee of 0.25%. Even this modest charge is partially waived for the first 12 months to draw in more investors in the early going. The Bitwise Bitcoin ETF (BITB -1.11%) drops even lower, offering the lowest annual fee of 0.2%. Bitwise's six-month fee waiver has already expired.
Grayscale stands apart from these low-cost ETF options, and not in a good way. Under the mutual fund structure, its total expense ratio was 2% per year, and Grayscale only backed it down to 1.5% in the ETF era. It is, by far, the highest expense ratio among the 11 approved options.
The long-term impact of deceivingly small fees
How much of a difference can this fee make in the long run? Perhaps more than you think.
Let's say you invest $10,000 in an ETF such as the Grayscale Bitcoin ETF, and the fund matches the S&P 500 (SNPINDEX: ^GSPC) index's long-term average annual return of approximately 10% for the next 30 years. With a 0.25% expense ratio, you'll end up with $162,981 in your pocket.
Change the fee ratio to 1.5%, and your take-home return drops all the way to $115,583. That's 29% below the low-fee option. These seemingly modest charges make a serious difference in the long run. It's easy to overlook this effect amid the noise of potentially huge Bitcoin gains, but a nearly 30% difference remains in the 30-year calculation, even for much higher annual returns.
It's no wonder Vanguard founder Jack Bogle was regarded as an investing genius for insisting on microscopic ETF fees.
Finding the right Bitcoin ETF for you
So, I wouldn't recommend buying Grayscale's Bitcoin ETF until the company drops its expense ratio much lower. It's easy enough to go with lower expense ratios from one of the other 10 spot Bitcoin ETFs on offer today, including the Bitwise and iShares alternatives mentioned earlier. Those would be my recommendations today if you're looking for some Bitcoin exposure in the handy ETF format.
Why, then, do I still own some Grayscale Bitcoin ETF shares? Because I'd rather absorb the relatively mild expenses until further notice than lock in a large tax charge for converting that position into a lower-fee choice. That particular holding sits in a standard brokerage account without the tax-shielding functions of my IRA account. A small management fee hurts less than a large tax bill, at least in the short term. I can only hope Grayscale eventually comes to its senses and lowers that fee ratio.
