Why a new challenger bitcoin trust likely poses little threat to GBTC's dominance

A new challenger to Grayscale’s publicly-traded Bitcoin Trust is marketing itself as a low-cost alternative. But market insiders are skeptical that Grayscale’s dominant position is in jeopardy.

“If you like bitcoin exposure at 2%, you’ll love it at 0.49%,” Greg King, founder of Osprey Funds, tweeted in November. King was referring to the 2% annual fee that Grayscale charges investors in its Grayscale Bitcoin Trust (GBTC).

Osprey Funds is behind the upstart Osprey Bitcoin Trust (OBTC). Its website also states that Osprey will only charge a 0.49% fee. OBTC is set to be listed on OTC Markets in the coming days, OTC Markets' Jason Paltrowitz confirmed to The Block. That will make it available to be traded like GBTC.

But there’s a catch — and it’s not the only reason market observers don’t expect Osprey’s new product to mount much of a challenge to Grayscale.

GBTC vs. OBTC

In fact, the claim that OBTC charges lower fees does not account for additional fees such as custodian, legal, and index licensing fees that will also be borne by investors.

This was explained in OBTC’s “confidential” private placement memorandum (which is publicly available via the internet).

When asked about the true total cost of OBTC, Osprey Funds founder Greg King declined to comment to The Block. "We're committed to providing bitcoin access to investors in a low-cost manner," he said.

GBTC already has a few rivals, such as 3iQ Corp and CI Galaxy’s bitcoin funds. But none have managed to threaten the prominent position of GBTC, Nikolaos Panigirtzoglou, managing director of JPMorgan’s global market strategy team, told The Block.

He added that even if the total cost of investing in OBTC is 0.49%, that “is not such a big deal” given that bitcoin is a very volatile asset. Lower fees matter much more in the case of fixed-income investments, he said.

“If you are a family office and you want to invest some money in bitcoin, then you want to be sure that you invest in a fund that is liquid and can continue to be liquid in the future. You don't want to be trapped in an illiquid investment or illiquid trust. Then you wouldn't care if you pay 150 basis points more,” said Panigirtzoglou.

Indeed, GBTC’s liquidity is one of its strongest attributes. The product sees daily average volumes of around $695 million, compared with around $10 million for 3iQ Corp’s QBTC and around $3 million for CI Galaxy’s BTCG.U.

Osprey’s King acknowledged that liquidity will be a challenge for OBTC — at least in the beginning. “Over time that could balance out, it's difficult to say at this point for sure," he said.

GBTC’s liquidity is “definitely a moat that it has,” Keegan Toci, former ETF strategist at BlackRock, told The Block, adding that it also has a first-mover advantage and a recognizable brand name. GBTC was launched in 2013 and is operated by Grayscale, a unit of crypto conglomerate Digital Currency Group.

Even if OBTC’s fees are attractive, it will still be “an uphill battle” for it to compete against GBTC, said Toci. While OBTC might attract some retail interest, institutional investors are likely going to remain with GBTC, he said.

In fact, more than 85% of GBTC’s investors are institutional, and many invest in the product mainly to take advantage of premium arbitrage.

GBTC’s premium exists because it doesn’t have redemption properties at net asset value (NAV) the way ETFs do. Trust products like GBTC are legally prohibited in the U.S. from having such a redemption program. The only way for large investors to sell their GBTC shares bought at NAV is via OTC Markets — and only after a lockup period of six months.

After that lockup period is over, investors can sell their shares at the prevailing market prices on OTC Markets. If the market prices are higher than the NAV, they gain the spread — the GBTC premium.

OBTC’s lockup period is 12-months. Osprey’s King said the firm has plans to reduce the lockup period to six months in the “near future.” To do so, however, OBTC will have to become an SEC reporting company the way GBTC has.

GBTC-turned-ETF?

So, a competing bitcoin trust product isn't likely to challenge GBTC. Could something else? “The only real threat I see to GBTC is a bitcoin ETF,” said Toci.

Since an ETF has a daily redemption mechanism, it would be a preferred vehicle for institutional investors, said JPMorgan’s Panigirtzoglou.

"Many investors are used to investing in ETFs. They know how they work, and their structures have been resilient and effective. So I think a bitcoin ETF would be a threat for GBTC," said Panigirtzoglou.

Instead of waiting for a challenge from an ETF, though, GBTC could become an ETF itself. “I'm sure they're looking at some sort of transition from a trust to an ETF to maintain the industry-leading asset gatherer position in the space,” said Toci.

"I'm sure Grayscale has got its finger on the pulse in terms of like when a bitcoin ETF might happen and who would be first in line to become a bitcoin ETF,” he said. “I'm sure they want to be first in line.”

But it's not clear when such an ETF might be approved. Several firms have applied for bitcoin ETFs in the past few years and all have been rejected. The SEC has expressed concerns about bitcoin's price volatility, its unregulated status, and potential industry manipulation, among other issues.

With a new U.S. presidential administration in place, however, some firms feel optimistic and have refiled their bitcoin ETF applications with the SEC in recent days.

“I would be shocked if there’s no bitcoin ETF in the market within three years,” said Toci.

Grayscale declined to comment for this story.