GBTC Experiences Largest Ever Outflow

Grayscale may have made a tactical error in keeping their fees high, despite initial indications to the contrary.

Is Grayscale the new bearwhale?

Amid the bitcoin correction, Grayscale's GBTC ETF has experienced its largest ever outflows in USD terms. On Monday, holders sold a record $642.5 million in shares, slightly above the previous record of $640.5 million on January 22.

In bitcoin terms this was 9,540 BTC, somewhat lower than the record for bitcoin redemptions, which also took place on January 22, when an incredible 16,088 BTC was pulled from the fund. At that point, bitcoin was trading below $40,000.

Grayscale's Pain Increases

Huge withdrawals were always expected for Grayscale. With fees running at 1.5%, six times higher than most of their competition, losing a large portion of their holders is simply the price of doing business. As the price of bitcoin hit new all-time highs, it didn't matter to Grayscale that they had lost a third of their assets under management (AUM), since the rising price of bitcoin offset that loss. The amount of money under management in USD terms remained roughly the same, and therefore so did their fees.

Greedy though it seems, it makes more sense for Grayscale to charge 1.5% on their huge stack of bitcoins than it does to try to compete with the likes of BlackRock. However, CEO Barry Silbert may shortly be rethinking his strategy.

Stunning Success

The bitcoin spot ETFs have proven staggeringly successful, blowing away analysts expectations. As BlackRock and Fidelity have taken the lion's share of investors' money, Grayscale has seen enormous redemptions. Despite starting with over 619,000 BTC, the fund has lost 250,000 BTC in two months, and now has around 360,000 BTC under management.

Grayscale began with a massive head start, but the strength of interest in bitcoin means that they are likely to be overtaken by BlackRock in the next couple of months, at most. Grayscale may have calculated that total flows would be smaller, and that investors would be content to stay with GBTC due to the fund's overall liquidity and reputation, as well as because for many holders, selling would incur significant capital gains tax.

Not so. They are now faced with a scenario where the price of bitcoin is falling, and outflows are picking up. Lower bitcoin prices mean lower capital gains tax bills for anyone switching funds. In other words, this correction is arguably the best opportunity for investors to bail on GBTC.

Short-Term Thinking

Grayscale's strategy was a short-term one. They may have calculated that it's worth holding 300,000 BTC at $70,000 and 1.5% fees, rather than 600,000 BTC at $70k and 0.25% fees.

They do not appear to have considered the possibility that they could have dropped their fee and attracted more customers, as well as benefiting from greater bitcoin adoption. 1 million BTC at $150,000 and 0.25% fees would have put them in a far better financial position, and created long-term revenues.

As it is, the situation is unsustainable for GBTC. It may not be long before Grayscale is an irrelevance to the market, and a footnote in Bitcoin's history.

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