Introduction

As the chances for a bitcoin Exchange-Traded Fund (ETF) appear to grow more likely, it is important for financial advisors and investors to understand the details of the different proposed funds, including the associated costs.

The Current Landscape

The Securities and Exchange Commission (SEC) has historically opposed an ETF that directly tracks 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. Many experts in the crypto and asset management industry now expect the first spot bitcoin funds to launch in 2024. The number of firms competing for a spot bitcoin ETF has already reached double-digits and continues to grow.

Franklin Templeton recently entered the competition as well. If these funds are eventually approved, a crucial factor for both asset managers and investors will be the management fees associated with the bitcoin ETFs.

Cost Comparison

Currently, the available fund options for investors looking to invest in crypto are expensive. For instance, the Grayscale Bitcoin Trust (GBTC) has a management fee of 2%, while the largest bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), has an expense ratio of 0.95%. In contrast, the largest equity index funds can have expense ratios as low as 0.10%.

Experts predict that the management fees for bitcoin ETFs will likely be lower than those of futures funds since they should be cheaper to operate for asset managers. Steven McClurg, the Chief Investment Officer at Valkyrie Investments, estimates that the cost will be around 50 basis points (0.50%). Likewise, Rid Edelman, the founder of the Digital Assets Council of Financial Professionals, expects the fees to fall between 50 and 100 basis points (0.50% to 1.00%).

Bryan Armour, the Director of Passive Strategies Research for North America at Morningstar, believes that these estimates may be too high. He points to a Roundhill Ether Futures ETF filing with a proposed fee of 0.19% as a more realistic target.

Competition and Price Compression

If the bitcoin ETFs are approved around the same time, it may be challenging for any single fund to gain a first-mover advantage and quickly scale, which would allow them to charge a premium. Armour suggests that these ETFs will eventually become commodities, with fees getting compressed over time. He predicts that even if fees start off slightly higher, it won’t be long before they decrease.

Additionally, there may be two groups of funds emerging, with larger firms catering to institutional investors and pricing their funds competitively, while smaller firms focusing on crypto expertise may charge higher fees, hoping to attract investors despite the higher cost.

Conclusion

As the possibility of bitcoin ETFs becomes more likely, investors and financial advisors should carefully consider the costs associated with these funds. While the current options for investing in crypto are expensive, experts predict that the management fees for bitcoin ETFs will be lower and may eventually be subject to price compression and increased competition.

It remains to be seen how the fees will ultimately shake out, but it is clear that cost considerations will be a significant factor for both asset managers and investors in the bitcoin ETF market.