The Bitcoin spot ETF is here, an analysis of the strength of 11 issuing companies and the biggest beneficiaries

1. History of Bitcoin Spot ETFs

Although the Winklevoss Bitcoin Trust was initially applied for in 2013, it was not officially rejected by the SEC until 2017. Over the past decade, the SEC has repeatedly expressed dissatisfaction with the unregulated nature of the cryptocurrency market and potential fraud, but this has not stopped related issuers from attempting to bring Bitcoin spot ETFs to market.

Grayscale launched the Grayscale Bitcoin Trust (GBTC) as early as 2013, initially open only to accredited investors, and retail investors could trade it only after it was listed in 2015. Why was GBTC able to launch smoothly? Because it was essentially traded on the over-the-counter market, requiring no SEC approval (but needing FINRA approval).

As a closed-end trust product, its downside is that the market price may deviate significantly from the net asset value of the underlying assets. Although technically buying it is equivalent to buying Bitcoin (because this trust directly holds Bitcoin), its price has always had a premium/discount relative to the net asset value of Bitcoin (with the maximum discount in 2021 approaching 50%). This means that investing in Bitcoin through GBTC is not very effective.

As a result, issuers including Bitwise and VanEck have repeatedly attempted to launch their own Bitcoin spot ETFs in recent years.

At the end of 2017, when CBOE listed the first batch of Bitcoin futures contracts and began trading, the situation began to change. Since these contracts could be launched smoothly, investors would expect related financial derivatives. In October 2021, the SEC finally approved Bitcoin futures ETFs.

However, shortly thereafter, Bitcoin futures ETFs faced their first awkward issue: at that time, a ProShares Bitcoin Strategy ETF (BITO) was launched three days ahead of the second ETF, Valkyrie Bitcoin Strategy ETF (BTF).

In the ETF space, first-mover advantage is significant, and the three-day difference led BITO to attract the attention of most investors. Currently, the total investment in crypto ETFs is $2.3 billion, with over $1.8 billion choosing BITO (rather than BTF), and the timing advantage helped ProShares become a big winner.

The second issue with Bitcoin futures ETFs is that they cannot perfectly track the true performance of Bitcoin.

Since the underlying of Bitcoin futures ETFs is futures contracts, the rollover costs incurred when transitioning from the current contract to the next one mean that the returns of Bitcoin futures ETFs always lag behind Bitcoin itself. Just last year, Bitcoin prices rose by 171%, while BITO's return was "only" 151%, a 20% difference is not a small number.

The following chart compares the price fluctuations of BITO and Bitcoin (red is BITO, green is Bitcoin):

This is why a Bitcoin spot ETF is very important. If investors are optimistic about Bitcoin, the optimal choice is, of course, Bitcoin itself, rather than derivatives.

In fact, Bitcoin spot ETFs already exist in Canada and Europe, and there are technically no trading issues, so it is inevitable that the SEC allows them to be listed in the U.S., the world's largest capital market.

2. New Changes in the Last Six Months

Before the second half of 2023, the usual path for Bitcoin spot ETF filings was as follows:

Issuer submits Bitcoin spot ETF application
Patiently wait
SEC delays decision on whether to approve
Continue waiting
SEC delays decision again
Continue waiting
SEC rejects

The SEC has always insisted that there is too much fraud and manipulation in the crypto market, so it chose to remain silent and indefinitely shelve issuers' applications. Although some investors believe that "delaying rather than directly rejecting" is not entirely a bad thing, after too much waiting, many began to feel disappointed.

Until the second half of 2023, the situation truly changed. The SEC began soliciting opinions from issuers, investors, and other stakeholders, inviting issuers to resubmit materials based on feedback. This was an important breakthrough, representing that the SEC was indeed willing to discuss rather than ignore.

In the past month, the SEC and issuers have repeatedly debated and requested multiple revisions to related documents, essentially addressing all of the SEC's concerns—the biggest challenges being oversight (how issuers monitor/resolve manipulation and fraud issues) and custody (how Bitcoin is stored).

The effective dialogue between the SEC and potential issuers has clearly become an important reason for the eventual approval of Bitcoin spot ETFs.

As for why January 10 is so important?

It's simple: this is the approval deadline for the ARK 21Shares Bitcoin ETF (ARKB). ARK is one of the important applicants for Bitcoin spot ETFs, and the SEC needs to decide whether to approve or reject before January 10.

Why were 11 Bitcoin spot ETFs (including GBTC) approved simultaneously on the 10th? Because the SEC learned from the lesson that a single ETF in the Bitcoin futures market could capture the vast majority of market share simply by being launched three days earlier. After all, allowing all prepared issuers to compete in the same arena is fairer and more beneficial for investors.

3. Prospects and Analysis of Bitcoin Spot ETFs

All 11 ETFs have Bitcoin as their underlying asset; what are their differentiating factors? Which issuers will ultimately come out on top? How should investors choose the ETF that suits them?

Three important indicators: fees, liquidity, and trading costs. Buy-and-hold investors should focus on fees, active traders should pay particular attention to liquidity, and all stakeholders should consider how the issuer's own trading costs ultimately affect ETF performance.

Specific targets and analyses are as follows:

iShares Bitcoin Trust (IBIT), Fee: 0.25% (waiver period 0.12%), Excellent Prospects

It is the most promising Bitcoin spot ETF. Given BlackRock's enormous asset scale and client advantages, it is hard to imagine IBIT not succeeding.

Moreover, from a market sentiment perspective, the likelihood of a Bitcoin spot ETF receiving SEC approval seemed very low before BlackRock announced its participation in the competition. It was BlackRock's involvement that greatly encouraged market confidence (other stakeholders even speculated that they knew some "insider information"). In terms of news and attention, BlackRock has always been the most followed.

Fidelity Bitcoin Trust (FBTC), Fee: 0.25% (waiver period 0%), Excellent Prospects

If nothing unexpected happens, Fidelity has a strong scale advantage. Although the company is not the absolute leader in the ETF space, it overall manages trillions of dollars in assets and will certainly recommend crypto investments to existing clients. As a giant in asset management, Fidelity's appeal should not be underestimated. Therefore, FBTC is expected to ultimately become a leading Bitcoin spot ETF product.

ARK 21Shares Bitcoin ETF (ARKB), Fee: 0.21% (waiver period 0%), Good Prospects

Cathie Wood has been involved in the crypto space for years and holds GBTC through multiple ARK funds. The current position is about $80 million, which may soon be fully transferred to ARKB. The Bitcoin ETF undoubtedly aligns with ARK's theme of disruptive innovation, and the 0.21% fee is also very low. Given that ARK typically charges 0.75% for its actively managed funds, it is clear that ARK is making significant efforts to win the market.

However, after the dismal performance in 2022, ARK's reputation is not as strong as it was at its peak in 2021, and it remains to be seen how many investors are willing to trust Cathie Wood again.

Grayscale Bitcoin Trust (GBTC), Fee: 1.50%, Good Prospects

GBTC was originally a trust with $27 billion in assets that is transitioning from a closed-end trust. It used to be the "only" investment channel for Bitcoin. Bitcoin futures ETFs did not pose a real threat, but spot Bitcoin ETFs can, especially those from companies like BlackRock and Fidelity. Now it hopes to maintain a 1.5% fee on its $27 billion asset base (down from 2% before the transition).

GBTC is likely to struggle to continue attracting significant new funds; the question is how long they can maintain their existing scale. They may lose scale due to other funds, but for quite some time, they will undoubtedly generate substantial revenue.

Bitwise Bitcoin ETF Trust (BITB), Fee: 0.20% (waiver period 0%), Good Prospects

In competition with companies like BlackRock and Fidelity, Bitwise does not seem to be a potential winner, but BITB could be a dark horse.

As of now, their fee is 0.20%, the lowest in its category, and they also offer a fee waiver. A small detail in their recently submitted documents indicates that as a crypto-native investment company, Bitwise has secured a nine-figure investment commitment from Pantera, which manages about $3.6 billion in assets. More companies may be interested in collaborating with them.

WisdomTree Bitcoin Trust (BTCW), Fee: 0.30% (waiver period 0%), Good Prospects

WisdomTree is an established player in the ETF market (ranked 9th in total assets), with ETFs covering cybersecurity, cloud computing, and artificial intelligence, but its foundation lies in traditional company stocks and bonds. BTCW may attract the attention of traditional investors.

Invesco Galaxy Bitcoin ETF (BTCO), Fee: 0.39% (waiver period 0%), Good Prospects

Invesco has a larger asset management scale than WisdomTree, is well-known, and their Nasdaq 100 index and related ETFs have decent appeal, which may create some spillover effects.

However, its advantages are not very pronounced. The fee waiver is a good start, but the subsequent 0.39% fee is completely uncompetitive.

VanEck Bitcoin Trust (HODL), Fee: 0.25%, Good Prospects

VanEck also manages a significant amount of assets, but not enough to be one of the leaders. Considering that VanEck was one of the first issuers to attempt to bring Bitcoin spot ETFs to market, it has some recognition, but it has no real advantage in terms of fees.

Valkyrie Bitcoin ETF (BRRR), Fee: 0.49% (waiver period 0%), Average Prospects

Valkyrie is an established player in the crypto ETF space. Their Bitcoin futures ETF ranks fourth in size. It is understandable that they did not catch up with BITO, but VanEck and ProShares launched their Bitcoin futures ETFs later and currently have surpassed it in size. This indicates that their competitive advantage is average, making it difficult to outperform BlackRock, Fidelity, and ARK in the future. Additionally, their post-waiver fees are among the highest.

Franklin Bitcoin ETF (EZBC), Fee: 0.29%, Average Prospects

Franklin, as an old-school asset management company, is better known for its mutual funds than ETFs. Among Bitcoin spot ETFs, EZBC may be the least recognized.

In 2017, Franklin launched a series of index ETFs across different markets, all with a fee set at 0.09%, aiming to leverage a low-cost strategy to gain an edge. Some achieved moderate success, but most have assets of less than $100 million, indicating that Franklin has not been able to break through with low costs. Coupled with no fee waivers, there is no reason to be optimistic about EZBC.

Hashdex Bitcoin ETF (DEFI), Fee: 0.90%, Average Prospects

Like Bitwise, Hashdex is a native crypto company, which should give them some advantages, but their high fees are a fatal weakness. Moreover, they are not well-known among ordinary investors.

4. Conclusion

We will soon find out who wins in the issuer competition. But clearly, investors are the biggest winners.

Previously, the leading Bitcoin futures ETF—BITO had a fee of 0.95%, so many expected the spot ETF fees to be at least 0.50%. Now, fierce competition has driven fees down to a minimum of 0.20%, with even short-term zero fees, and billions of dollars in new funds are expected to flow into the related market soon.

The RockFlow research team has compiled all of the above ETFs into a "Bitcoin Spot ETF" stock list for easy one-click investment in the crypto market:

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