MEXC Research: Bitcoin ETF, Market Value Exposure Beyond Trillions of U.S. Dollars
Bitcoin ETF, namely Exchange Traded funds, is a cryptocurrency trading fund. Traders can gain exposure to Bitcoin through the traditional stock market without buying and selling cryptocurrency assets directly on the cryptocurrency exchange.
At present, the well-known Bitcoin ETFs in the market mainly include GTBC, the Bitcoin fund launched by Grayscale and BTCC, the trust fund established by Canadian asset management company Purpose Investments Inc.
Both are valuated in traditional fiat currency, which is a regulated and compliant traditional financial product. Fund companies will hold physical Bitcoin for each share purchased or traded by investors and put it in the custody of crypto companies in a cold wallet, rather than tracking asset prices through financial instruments such as derivatives or futures contracts. Investors can enter the Bitcoin fund market through fiat currency. This helps more investors with traditional fund preferences to enter the cryptocurrency market.
However, the Bitcoin trust funds in the market originate from many regions and institutions, so the product types and user thresholds of the funds are different.
1
Grayscale was established on September 25, 2013. It opened the quotation exposure of Bitcoin fund on 4th May 2015, and registered with the SEC on January 21, 2020. It is the world’s largest compliant Bitcoin trust product (ETP). As of June 18, Grayscale’s GBTC holdings are about 651,722 BTC tokens.
As the price of Bitcoin keeps rising after the three halving cycles, the long-term holders receive much more profits than the traditional stock market and trust funds. According to Grayscale’s official company website, the company currently manages $2.07 billion USD of GBTC, with current historical revenue of 21,242.86%.
（Not maximum earnings)
However, due to the attributes of GBTC, the trust fund is more suitable for investments such as ARK institutional investors, high-income individual investors, and retail investors that do not have a small amount of funds. Its exposure barriers are mainly presented in the following aspects:
1. GBTC only accepts qualified investors: Under the rules on eligible investors, individual investors need to have a net asset of $1 million USD or an annual income of more than $200 thousand USD; Institutional investors need to meet the asset size of $5 million USD and meet the requirements of registered entities. The product design of GBTC is that it has a minimum access threshold of $50 thousand USD, and institutional investors have access to purchase through offshore entities.
According to Grayscale’s Q4 statistics in 2020, institutional investors make up 87%, where 54% were purchased by offshore entities. In Q4 alone, the total inflow of equivalent BTC exceeded 170,000 tokens in the first quarter. According to previous data, physical subscriptions accounted for more than 70%.
2. The subscription shares of the primary market can only be sold in the secondary market after six months from the date of subscription: Grayscale’s GBTC has a six-month lock-up period, and the subscription shares of investors in the primary market can only be sold in the secondary market after six months, and the trading flexibility is significantly weaker than that of ETF products.
The general Bitcoin ETF funds do not need hedging and can fulfil T + 0 transactions between the primary and secondary markets. That is, investors can sell their ETF shares in the primary market on the same day in the secondary market. In addition, a basket of stocks redeemed through ETF funds can also be sold in the secondary market on the same day.
3. 2% of Annual management fee: Grayscale’s GBTC annual management fee, which is calculated in U.S. dollars and in BTC day by day; The accounting time is 4 p.m. New York time every day, and the accounting benchmark is the Bitcoin holdings in the trust. Two problems will arise in this management fee model. First, the 2% management fee rate is significantly higher than the 0.44% average management fee rate of ETF; Secondly, since the management fee is settled in currency and the user does not hold the currency directly, the fee will be deducted from the BTC share corresponding to the user’s GBTC share.
4. Long-term positive Premium: Since GBTC’s trust shares have a long-term positive premium in the secondary market, the price of each share (GBTC) usually exceeds the price actually used to purchase Bitcoin. The premium of GBTC spawned the arbitrage demand, and buying at BTC spot price and selling at GBTC premium when it is unlocked will cause the arbitrage to further spawn the GBTC premium.
Previously, when GBTC matured, large investors sold GBTC from OTCQX, and then bought BTC from the market, further raising the spot price of BTC.
The essence of GBTC lies in that it takes advantage of the resource asymmetry caused by the regulation of crypto assets in the United States. In short, due to the existence of regulation, not all state residents or individuals can buy crypto assets. At the same time, Grayscale’s parent company, Genesis that holds BitLicense, has the right to legally purchase crypto assets, which other institutions or investors do not have.
After that, Grayscale further differentiated the resource asymmetry and sold one-way ETF products to a large amount of funds, so that a large amount of BTCs flowed into their own hands, while institutions and qualified investors could sell GBTC in the secondary market, allowing retail investors who were not eligible to invest in GBTC to take over.
For the retail investors, although there is a premium, BTC rising dividend can be obtained by purchasing GBTC, which also brings liquidity. Until the recent market turns cold, institutions sell more than they buy, causing GBTC to produce negative premiums. If the long-term negative premium of GBTC is affected by the market, on the one hand, it will reduce the number of new entrants to the market, thus reducing the secondary liquidity. On the other hand, investors can also choose direct spot trading.
2
BTCC is another Bitcoin ETF in the North American market, which was launched by Canadian Asset Management Company Purpose Investments Inc. on February 18. BTCC began trading on the Toronto Stock Exchange (TSX) in Canada, offering two trading units, the Canadian Dollar and U.S. Dollar. As of July 18, 2021, Purpose Investments Inc. holds about 20,221 tokens of BTC’s BTCC.
The launch of BTCC can be said to expand the Bitcoin investment exposure further. This is mainly based on the following points:
1.Compared to GBTC, BTCC’s investment threshold is lower.
2.Lower premium, the BTCC premium purchased by investors is lower than GBTC’s premium rate.
3.No locked position mechanism.
BTCC, launched by Purpose Investments Inc., has unique attributes such as low threshold, low premium and no lock-up position. This puts Grayscale in a competitive advantage, making it easy for the investors to enter the Bitcoin trading exposure and enhances liquidity.
However, the redemption terms of BTCC are more stringent. First of all, the redemption price of BTCC can only be the lower of 95% of NAV or ETF price. In other words, if the price of ETF is discounted when the price of Bitcoin is high, investors who redeem fund shares may not get 95% of the price of ETF.
If the risk of exchange is added, users may not be able to buy the number of Bitcoins corresponding to ETF shares. In addition, the type of funds to be redeemed is entirely determined by the fund manager, and in most cases, only cash can be redeemed without Bitcoin. However, compared with GBTC products, it still has the advantages of no lock-up period, low investment threshold and better liquidity mechanism.
Another important Bitcoin ETF in North America is that 3iQ Corp launched QTBC. At present, the Canadian encryption asset management company 3iQ has submitted an application for Bitcoin ETF and is waiting for approval. On 13th April this year, its QTBC position was 23,502 BTC tokens, which dropped to 12,949 tokens on July 16.
In general, the scale of the Bitcoin ETF market in Canada is smaller than in the United States. The scale of the Bitcoin ETF market is much smaller than the market value of Bitcoin in the cryptocurrency market.
However, from the perspective of transaction cost, the management fee of BTCC under Purpose is 1%, and the management fee of Evolve is 0.75%, which are lower than the transaction rate of the compliant exchanges and lower than the 2% of the management fee of Grayscale’s Bitcoin ETF GBTC.
But in the long run, based on the product advantages of the current Bitcoin ETF in the Canadian market, more American investors may have the opportunity to enter the Canadian market, unless the Bitcoin ETF is submitted by dozens of institutions such as the Winklevoss Brothers has been approved by the SEC.
In addition, the exposure of Bitcoin ETF products comes from the traditional stock market and fund accounts. There is no need to learn how to use the wallet for these users, so it is more convenient to deposit and withdraw money, and they can directly use the traditional ETF account to perform operations. The convenience of these products will help Bitcoin ETF to open up market exposure of billions of U.S. Dollars or even trillions of U.S dollars. It is only a matter of time before this day comes.
