Bitcoin fell below $39,000! Grayscale billions of funds outflowed! An important promoter of ETF listing turned into a loser?

The U.S. Securities and Exchange Commission (SEC) made a rare compromise this month to approve the listing of a Bitcoin spot ETF for the first time in history, marking a milestone moment for digital currencies. Behind this is Grayscale Investments, an important participant in the digital currency market.

Last August, Grayscale won a key lawsuit against the U.S. SEC, in which a judge of the Washington, D.C. Circuit Court of Appeals ruled that the SEC's decision to approve the Bitcoin futures ETF while denying Grayscale's decision to convert GBTC to a spot Bitcoin ETF was "arbitrary and capricious."

The court's ruling kicked off a sharp rally in cryptocurrencies as there was speculation that the US SEC would eventually have to compromise and give the green light to the growing demand for spot bitcoin ETFs. This is indeed the case. Recently, SEC Chairman Gary Gensler said that the court's ruling last year forced the SEC to change and finally approve the listing of spot bitcoin ETFs.

However, Grayscale, the leader, its spot bitcoin ETF GBTC, is facing large outflows. According to media data, there have been $2.8 billion in outflows as of Friday since the Grayscale Bitcoin Trust was transformed into an ETF on January 11. The remaining nine newly listed spot bitcoin ETFs collectively attracted about $4 billion in inflows, with BlackRock and Fidelity Investments each attracting more than $1 billion. However, the grayscale GBTC is still the largest, with a whopping $22.9 billion.

The reason for the large-scale outflow of funds is closely related to its high fees. Currently, there is fierce competition among Bitcoin ETF issuers and they are cutting fees to attract investors. While Grayscale has reduced its management fee from 2% to 1.5%, it is still several times higher than other competitors, and there are even issuers offering large promotions with 0 management fees in the early months of Bitcoin ETF listing. Grayscale's CEO said the 1.5% rate is justified given his fund's liquidity, tight spreads, and a proven track record over the past decade.

However, in the face of such expensive fees, why do many investors still hold GBTC?

Formerly known as the Bitcoin Trust, GBTC was originally established in 2013 as a way for investors to invest in Bitcoin without having to buy and hold it directly. But in the case of Bitcoin trusts, investors cannot easily exchange for Bitcoin, so there will be trades at a premium or discount to the underlying asset.

Since the beginning of 2021, the GBTC Bitcoin Trust has been trading at an increasingly high discount, peaking at a discount of nearly 50% in December 2022. After the conversion of GBTC into an ETF, its discount has narrowed to close to 0.

Many investors who hold GBTC are likely to be in a state of substantial profitability, especially those who bought at a huge discount to GBTC, and they have not only reaped the increase in bitcoin since last year, but also received additional profits from the elimination of the discount. This may be the courage of Grayscale to charge the most expensive management fee in the industry.

Since the listing of the Bitcoin spot ETF on January 11, Bitcoin has stepped out of the classic "sell facts" situation. On Tuesday, digital currencies fell again, with Ether falling more than 6% in 24 hours, and Bitcoin also falling about 2%, briefly falling below $39,000 intraday.

According to JPMorgan analysts, investors took profits after the GBTC price rose and switched to competitors with lower fees, which dragged down the cryptocurrency market.

Another important reason is the sell-off of FTX, which Wall Street saw yesterday. Coinglass data shows that long Bitcoin position liquidations have been sizable since the launch of the Bitcoin ETF, but Tuesday's data was significantly lower, suggesting that the initial sell-off may be slowing.

Peter Schiff, a well-known financial commentator in the United States, was dismissive, saying:

The new Bitcoin ETF did not create additional demand, it only changed it. Investors who may have already bought actual Bitcoin, Bitcoin-related stocks, have only switched to a new ETF. Rearranging the deck chairs did not stop the boat from sinking.