Grayscale ‘fought the law and won’ to help get Bitcoin ETFs approved. So why did billions of dollars pour out of GBTC?

“They fought the law and won,” Eric Balcanus, Bloomberg’s ETF analyst, told Fortune. “You have to give them credit, and tip your hat.”

When the SEC repeatedly denied Grayscale’s application to convert its closed-end trust into a spot exchange-traded fund, the asset manager fought back. But since the much-anticipated Jan. 11 approval, Grayscale’s trust-turned-fund, GBTC, has seen outflows of over $5.2 billion, according to Bloomberg data. 

By freeing up investors to redeem their shares, it unleashed staggering outflows, leading some analysts to speculate whether Grayscale could be the architect of its own downfall.

Understanding the outflows

Starting in 2013 as a closed-end trust fund, GBTC was the only real option to trade Bitcoin on the stock market, for which investors paid a premium. But since February 2021, it has traded at a deep discount, hitting record lows of almost 50% in December 2022. Investors had been locked into the trust, while they watched GBTC’s discount on the underlying asset, Bitcoin, widen, Bloomberg ETF analyst James Seyffart told Fortune.

That was the case until Jan. 11.

Experts told Fortune the outflows so far typically have fallen into three categories: investors wanting to jump ship for lower fees, sales by FTX, and investors who were betting on the SEC approving spot Bitcoin ETFs.

The Bitcoin ETFs are engaged in a fierce race to the bottom on rates, a competition in which Grayscale has no interest.

At 1.5%, GBTC charges the highest fee among peers, whereas competitors have all kept fees below 0.3%, according to Bloomberg data. Both Seyffart and Balcanus estimate that a third of the outflows belong to investors seeking lower fees, and lightly held GBTC in their IRAs, and thus aren’t subject to capital gains taxes. (This also could mean about a third of outflows have been reinvested into competing ETFs.)

Meanwhile, the analysts also attribute outflows to FTX liquidating its GBTC holdings as part of the firm’s bankruptcy proceedings. FTX has sold 22.28 million shares—worth roughly $1 billion—to eliminate its GBTC position, CoinDesk reported. 

The third category of sellers, Seyffart and Balcanus explained, likely have been typical “buy the rumor, sell the news” investors. “They were using GBTC to bet on a Bitcoin ETF approval,” says Seyffart. “They were just basically betting on the discount collapsing.”

A Grayscale spokeswoman told Fortune that GBTC will continue to provide investors and capital market allocators with “credible, confident, and regulated” exposure to Bitcoin, and remains the “backbone” of the ETF market.

‘Playing the waiting game’

But outflows haven’t yet dislodged Grayscale’s market dominance. With assets of over $21 billion, GBTC still represents the lion’s share of the total Bitcoin ETF value of about $27.2 billion. This leaves the 10 further funds that have joined the so-called “cointucky derby” since the approval trailing. Meanwhile, digital asset manager CoinShares reported on Monday that outflows may be beginning to slow.

During the first two weeks of trading, the daily outflow average was approximately $530 million, whereas it has been reducing since Thursday, falling to $191 million on Monday—the lowest since trading began.

“In my opinion, last week was the last with strong outflow,” said Matteo Greco, a crypto analyst at Fineqia. But he also said fresh inflows to GBTC are unlikely. “For new customers, it’s not really sensible, because they have much, much less-expensive options.”

The remaining GBTC likely belongs to non-IRA investors who are planning on staying put, analysts said, because redeeming those shares would be a taxable event. The 20% tax on large gains accumulated since the trust’s formation will trump the 1.5% annual fee. “The math is gonna favor staying,” says Balcanus.

“They’re probably just playing the game of let-me-just-wait-this-thing-out for two or three years, until that calculation on the spreadsheet at DCG (Digital Currency Group) flips, and they reduce the price,” says Swan CEO Cory Klippsten, hinting at a fee cut in the next few years. “I think a lot of people are just playing the waiting game.”