Since the start, iShares Bitcoin Trust (IBIT) and Grayscale Bitcoin Trust (GBTC) have held the #1 and #2 AUMs for spot Bitcoin ETFs, respectively.
This article delves into a comprehensive comparison of IBIT and GBTC, aiming to provide clear insights for both seasoned and novice investors.
We’ll explore their distinct characteristics, benefits, performance, fees, and drawbacks, focusing on how spot Bitcoin ETFs fit into the broader context of Bitcoin investment strategies.
TL; DR: IBIT and GBTC cater to different investor needs and risk appetites. IBIT is preferable for those seeking an ETF structure with competitive fees and direct exposure to Bitcoin, while GBTC suits investors seeking exposure to Bitcoin’s price movements despite potentially higher fees and the risk of trading at premiums or discounts.
iShares Bitcoin Trust (IBIT)
The iShares Bitcoin Trust (IBIT) is an exchange-traded fund (ETF) designed to provide investors with exposure to Bitcoin. Managed by BlackRock, IBIT aims to mirror Bitcoin’s performance by holding the actual cryptocurrency or Bitcoin futures contracts. It offers a way for investors to gain exposure to Bitcoin without the need to directly buy, store, or manage the cryptocurrency themselves.
1. Access: IBIT enables investors to access Bitcoin within a traditional brokerage account.
2. Convenience: IBIT can help remove operational burdens associated with holding bitcoin directly, as well as potentially high trading costs and tax reporting complexities.
3. Quality: IBIT is built by BlackRock, the world’s largest asset manager and ETF provider, with a history of innovation.*
* BlackRock is the world’s largest ETF manager by AUM, managing $3.5T in global ETF investment vehicles as of December 31, 2023.
Regulated Product: As a product managed by BlackRock, IBIT is subject to regulatory oversight, which can provide additional transparency and investor protection.
Diversification: Allows investors to include Bitcoin in their diversified investment portfolios through a familiar financial instrument.
Secure Custody: Bitcoin held by the Trust is stored with secure custodians, reducing the risk associated with individual cryptocurrency storage.
Liquidity: Shares of IBIT are traded on traditional stock exchanges, providing liquidity and ease of buying and selling.
Cons
Management Fees: The Trust charges management fees, which can reduce overall returns compared to holding Bitcoin directly.
Tracking Errors: Due to factors such as fees and market conditions, IBIT’s performance may not perfectly match Bitcoin’s.
Limited Control: Investors do not have direct control over the Bitcoin held by the Trust, which can be a drawback for those who prefer to manage their own cryptocurrency holdings.
Regulatory Risks: Regulation changes could impact the Trust’s operations or ability to hold Bitcoin.
Market Risk: As with any investment in Bitcoin, IBIT is subject to the volatility and market risks associated with the cryptocurrency.
Potential Premiums: The share price of IBIT may trade at a premium or discount to the net asset value (NAV) of the Bitcoin held by the Trust, potentially affecting investment returns.
Grayscale Bitcoin Trust (GBTC)
The Grayscale Bitcoin Trust, the world’s 2nd largest Bitcoin ETF, offers investors the opportunity to invest in Bitcoin as a security, circumventing the difficulties associated with the direct purchase, storage, and safekeeping of Bitcoin.
Through Coinbase Custody, the Trust passively possesses real Bitcoin. With AUM totaling $16.93 billion, it levies investors a 1.50% annual fee. On average, it experiences a substantial daily trading volume, exceeding 26 million shares.
Despite all of GBTC’s competitors lowering their spot Bitcoin ETF fees just before the SEC approved 10 spot Bitcoin ETFs, GBTC notably did not.
GBTC remains at 1.5% — the highest of any provider.
GBTC Overview
GBTC offers investors a traditional investment vehicle to gain exposure to Bitcoin’s price movements without the challenges of buying, storing, and safekeeping Bitcoin directly.
GBTC holds actual Bitcoin as a trust, and its shares are traded over the counter.
Key Facts
Structure: GBTC is a trust, not an ETF. It trades over the counter (OTC) and doesn’t offer the same liquidity as ETFs like IBIT.
Investment Focus: GBTC holds actual Bitcoin, offering more direct exposure to Bitcoin’s price.
Fees: The annual fee for GBTC tends to be higher, accounting for security, storage, and insurance of the held Bitcoins.
Performance: GBTC’s price can deviate significantly from the underlying Bitcoin price, often trading at a premium or discount.
Direct Exposure to Bitcoin: GBTC holds actual Bitcoin, directly exposing its price movements.
Simplicity: It’s a straightforward way for investors to gain exposure to Bitcoin without the complexities of managing Bitcoin wallets and keys.
Traditional Investment Vehicle: As a trust, it can be held in certain tax-advantaged accounts, like IRAs.
Cons
Higher Fees: GBTC typically has a higher fee structure due to the costs of securely holding physical Bitcoin. Grayscale has by far the highest Bitcoin ETF fee (1.50%) of any approved Bitcoin ETF.
Premiums or Discounts: GBTC can trade at significant premiums or discounts to the underlying Bitcoin price, affecting investment value.
Less Liquidity: Being an OTC product, it lacks the same level of liquidity as a standard ETF.
ETF Conversion Risk: May be forced to “sell & rebuy” Bitcoin as part of the ETF conversion process and may involve capital gains taxes.
Key Comparisons: Fees and Performance
Performance Metrics
IBIT’s performance is tied directly to the spot price of Bitcoin, providing a more direct correlation with Bitcoin’s worth.
GBTC’s performance is also correlated with Bitcoin’s price but is subject to premiums or discounts based on market demand for the shares.
Fees Impact
IBIT has a competitive fee structure that is attractive for cost-conscious investors.
GBTC’s higher fees cater to the Trust’s direct exposure to Bitcoin and additional security measures.
Spot Bitcoin ETF Fees and Holdings (As of July 26th, 2024)
When deciding between IBIT and GBTC, several factors must be considered to determine which investment vehicle best suits your needs and investment strategy.
Discounted Fees: Some ETFs may offer discounted fees for a limited period, so investors should know the terms.
Trustworthy Companies: To ensure security and reliability, choose an ETF backed by a trusted company with substantial assets under management (AUM).
Here are key aspects to evaluate:
Management Fees
IBIT: Understand the specific management fee charged by IBIT and how it impacts your overall returns. IBIT may have lower fees than some other Bitcoin trusts.
GBTC: Compare the fees associated with GBTC, which are often higher. Higher fees can erode your returns, especially if you plan a long-term investment.
Tracking Performance
IBIT: Evaluate how closely IBIT tracks the price of Bitcoin. Consider any potential tracking errors and how they might affect your investment.
GBTC: Assess GBTC’s historical performance about Bitcoin’s price. GBTC has sometimes traded at significant premiums or discounts to its net asset value (NAV).
Liquidity and Trading
IBIT: Check the liquidity of IBIT shares and how easily they can be bought or sold on traditional stock exchanges. Higher liquidity generally means easier trading.
GBTC: Consider the liquidity of GBTC shares, which can vary. Understanding market demand and trading volumes can help you plan your entry and exit strategies.
Custody and Security
IBIT: Review the security measures and custodial arrangements for the Bitcoin held by IBIT. Secure custody is crucial to protect your investment.
GBTC: Investigate GBTC’s custodial practices to ensure that your assets are safely stored and protected against potential security threats.
Regulatory Environment
IBIT: Consider the regulatory framework governing IBIT, including any recent changes or anticipated regulations that could impact the Trust.
GBTC: Examine the regulatory landscape for GBTC and how it complies with existing regulations. Regulatory clarity can provide investors with peace of mind.
Market Sentiment and Premiums
IBIT: Be aware of how IBIT’s share price may trade in relation to its NAV. Market sentiment can influence whether IBIT trades at a premium or discount.
GBTC: Historically, GBTC has experienced significant premiums and discounts. Understanding these market dynamics can help you make informed decisions about timing your investments.
Investment Goals
IBIT: Align your choice with your overall investment goals and risk tolerance. Consider whether IBIT fits into your portfolio strategy and long-term financial objectives.
GBTC: Reflect on how GBTC aligns with your investment goals, especially if you seek exposure to Bitcoin through a more established trust with a longer track record.
By carefully evaluating these factors, you can decide whether IBIT or GBTC is the right choice for your Bitcoin investment needs. For more detailed information on IBIT and GBTC, you can visit their respective pages: IBIT and GBTC.
IBIT and GBTC cater to different investor needs and risk appetites. IBIT is preferable for those seeking an ETF structure with competitive fees and direct exposure to Bitcoin, while GBTC suits investors seeking exposure to Bitcoin’s price movements despite potentially higher fees and the risk of trading at premiums or discounts.
Secure your financial future with Bitcoin investments tailored to your needs.
For more information, contact Terrence Yang, Swan’s Managing Director, at terrence@swan.com or 312.448.8012 (text or call) for details.
Drew, a class of 2013 Bitcoiner, is a Research Analyst for Swan Bitcoin.
He has worked in institutional VC/PE, FinTech, and DLT consulting for over six years. He also brings over twelve years of experience working with national nonprofits and start-ups in education and software development in several leadership roles.
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