The Potential Cost of Bitcoin ETFs Explained

Introduction

As the possibility of a bitcoin ETF becomes more likely, it is important for financial advisors and investors to understand the details of the different proposed funds, including their costs.

Growing Expectations for Bitcoin ETFs

The Securities and Exchange Commission (SEC) has traditionally been opposed to ETFs directly tracking the price of bitcoin. However, recent developments, such as a fund proposal from BlackRock and a court ruling in favor of Grayscale, suggest that this stance may soon change. Industry experts now anticipate the launch of the first spot bitcoin funds in 2024, with numerous firms vying for a spot bitcoin ETF.

The Importance of Management Fees

Should these funds be approved, management fees will be a crucial factor for both asset managers and investors. Currently, existing investment options for cryptocurrencies are expensive. For example, the Grayscale Bitcoin Trust (GBTC) carries a 2% management fee, while the ProShares Bitcoin Strategy ETF (BITO), the largest bitcoin futures ETF, has an expense ratio of 0.95%. In contrast, the expenses of equity index funds can be as low as 0.10%.

Predictions for Bitcoin ETF Fees

Experts have varying opinions on the potential management fees for bitcoin ETFs. Steven McClurg, CIO at Valkyrie Investments, expects fees to be below those of futures funds due to lower operating costs for asset managers. He predicts that fees will likely settle around 50 basis points (0.50%). Rid Edelman, founder of the Digital Assets Council of Financial Professionals, estimates fees to range between 50 and 100 basis points (0.50% to 1.00%). Bryan Armour, director of passive strategies research for North America at Morningstar, suggests a realistic target fee based on a proposed 0.19% fee in a Roundhill Ether Futures ETF filing.

Competitive Factors and Potential Scenarios

If multiple bitcoin ETFs are approved simultaneously, it may be challenging for any one fund to gain a first-mover advantage and scale quickly, potentially leading to lower fees. Armour believes that the competitive landscape will eventually treat bitcoin ETFs as commodities, resulting in fee compression. There may also be a division between larger firms catering to institutional investors, offering lower fees, and smaller firms focusing on crypto expertise but with higher fees.

Conclusion

As the possibility of bitcoin ETFs becomes more likely, investors and advisors should carefully consider the management fees associated with these funds. The ultimate fee structure will depend on various factors, including competition among asset managers, market dynamics, and investor preferences.