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What Is Grayscale Playing At?
Grayscale knows that even if their AUM is cut in half, 1.5% on ten billion dollars is a whole lot more money than 0.25% on $20 billion.
Since the launch of those 10 spot ETFs, BTC prices have been sliding. Part of this is a (predictable) sell-the-news reaction to a major event that has been anticipated for months. But part of it has been driven by one of the ETFs itself: GBTC.
Having set its fees stubbornly high at 1.5%, Grayscale is now seeing thousands of BTC leave its fund every day for cheaper alternatives. There are other reasons for the bleeding: FTX dumping its GBTC stake, and traders taking profit on the GBTC discount that was in play for many months. But it's clear that the fees make it unattractive to anyone who wants to hold for the long term, since Grayscale is charging at least 1% more than anyone else.
What are they thinking?
Tax: The Only Certainty In Life
The reasons why Grayscale set its fees so high are potentially very simple. Anyone who has bought GBTC back when bitcoin prices were lower has made a capital gain. For those who hold their shares in a tax-exempt account (like a retirement account), this does not matter. They can sell GBTC without penalty.
But for the others, that capital gain will be taxed upon selling. They could end up paying 10% or even 20% of the gain, which might far exceed what they pay due to the 1.5% fee.
Many GBTC holders will be stuck, not wanting to take the capital gains tax hit at this point in the cycle, grudgingly accepting the additional 1% annual fee in the meantime.
A Matter Of Math
As for Grayscale, they will have done the math. They will know roughly how many shares are held in tax-privileged accounts, and how many are not. They will have estimates of how much GBTC might be sold in the coming months.
1.5% is a huge fee, compared to the 0.25% ballpark fee charged by the other nine. But the math stacks up.
Grayscale has a huge head start on the other ETFs. Even after many days of straight outflows, they still have over half a million BTC under management: Well over 10x any of their competition's holdings. While every other ETF was trying to figure out how to get capital in, Grayscale were figuring out how to maximize revenues on what they already have.
They will know that even if that number is cut in half again by their price gouging, a 1.5% on ten billion dollars ($150 million a year) is a whole lot more money than 0.25% on $20 billion.
If they tank the market and lose 50% of their AUM in the process? Financially, it's still a good deal, and that's what matters (at least, to them).
When Will It End?
Grayscale have seen outflows of more than 10,000 BTC per day so far. If that continued, it would still be almost two months before GBTC was empty. Of course, it won't get that bad, for the reasons outlined above.
With FTX's sales out of the way, and after that first exodus of capital, the rate is likely to slow somewhat, but the bleeding could still go on for several more weeks. The good news is that if the inflows continue at the same rate to the other nine, Grayscale's effect will be more and more offset.
Moreover, the lower BTC goes, the less of a tax hit those holders will be taking if they sell—potentially leading to a capitulation event as certain price thresholds are reached.
There are also early indications that the bottom might be in, thanks to everyone's favorite contrarian indicator:
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