Grayscale Launches “Mini” Bitcoin ETF to Innovate in Competitive Market
After a lackluster first quarter, Grayscale debuts the "Mini" ETF right after the halving. With the industry's lowest fees, the Bitcoin Mini Trust seeks to restore investor confidence.
Now that the dust has settled from Bitcoin’s most recent halving, Grayscale is launching a new ETF product to hit the ground running: a Grayscale Bitcoin “Mini” Trust.
The Bitcoin halving has been a long-awaited and much-discussed event, a real showstopper that threw long-held truisms about the “natural” course of these scheduled code executions into complete disarray. Normally, a few months of doldrums follow a halving, after which the price of bitcoin spikes dramatically to an all-time high. This trend is observable back through all previous halvings. However, bitcoin’s price reached an all-time high weeks prior to the halving, an unprecedented event, and no one is certain how the market will move forward.
A variety of reasons have emerged as to why this halving might be different from all other halvings; for one thing, new inscription protocols incentivized the halving block to be the most expensive block ever mined. It’s only natural for miners to ramp up their efforts before revenues are cut in half, to be sure, but the wild race for the post-halving bitcoins was powered by new market developments Satoshi never dreamed of. However, innovations like this pale in comparison to the transformative power of the Bitcoin ETF.
The race to the Bitcoin ETF was spearheaded by Grayscale, a bitcoin-native asset management firm that led a number of larger non-native firms to support their efforts through repeated lobbying and legal battles with the SEC, a constant pressure that finally won approval for a new financial instrument directly tied to bitcoin’s worth. Since the Bitcoin spot ETF was approved in January, the floodgates poured open, with net inflows for this new market surpassing $12 billion in the first quarter. The stated sales pitch of the ETF was to make bitcoin more accessible to the broader market, allowing private and corporate investors to become more entangled with its economic futures. To put it bluntly, it worked.
The ETF became an avenue for capital to flow into the Bitcoin space from all angles, with financial institutions big and small purchasing ETF shares. Although these shares themselves did not constitute direct access to bitcoin, the actual issuers began buying at astronomical rates to accommodate the increased demand. This led to an unprecedented situation in bitcoin, where major capital inflows from traditional finance actually outpaced the entire community’s demand, thus causing the claim that the old rules around a halving no longer applied. Newcomers to the scene were not the only ones to hold this belief, with prominent figures considering the halving “priced in." As Fred Thiel, CEO of leading miner Marathon, put it in an interview, “I think the ETF approval, which has been a huge success, has attracted capital into the market and essentially brought forward what could have been the price appreciation we typically would have seen three to six months post-halving.”.
However, even as the ETF was raking in the kind of profits that inspire major paradigm shifts, there was one clear loser on the market. The net inflows for the entire ETF field were around $12 billion, with BlackRock even eclipsing that figure because early leader Grayscale had been hemorrhaging nearly $15 billion in outflows. The firm set fees for its ETF, the Grayscale Bitcoin Trust (GBTC), at substantially higher rates than any other competitor, and consumers were evidently not interested. In late March, the company lost nearly $2 billion in a single week, and it was only around this time that CEO Michael Sonnenshein announced that the company would indeed lower its fees. Nevertheless, confidence in Grayscale was shaken.
Meanwhile, in the rest of the ETF world, the halving was sending shockwaves throughout all corners of Bitcoin. Miners temporarily saw extremely high revenue that cratered in short order, and the ETF market contracted while these volatile developments were underway. Factors like a general supply shock in available bitcoin and global geopolitical developments were also considered, but the end result was the same: demand for the ETF had slowed to a crawl. Grayscale managed to take advantage of this trend too, with its outflows turning into a slow trickle rather than a raging torrent. Nevertheless, Grayscale was certainly still at the bottom of the pack, never relinquishing the title of biggest loser. On the night of the halving, the industry as a whole made profit, but Grayscale could only boast that it “halved” its rate of loss compared to the day prior. A situation like this is not sustainable.
It’s in this atypical environment that Grayscale decided to revolutionize its offerings with a new ETF product, the “mini” Bitcoin Trust. It’s important to remember that, despite all of the initial losses from the high fees, Grayscale is still a Bitcoin-native company. Traditional financiers that entered the ETF market, such as BlackRock, may have higher trading volumes, but Grayscale is only able to afford these losses because it holds the most actual bitcoin. Even after all these outflows, it still holds nearly $20 billion. GBTC was a pre-existing fund before the SEC actually approved an ETF, and Grayscale was the only company that could transform a previous product into the new ETF. Many prior customers simply pulled their money out of GBTC, earned a profit for their trouble, and re-invested their money in a competitor. In other words, the company’s head start was substantial enough that it could afford to sweat even massive losses because it ultimately viewed them as temporary. Grayscale has planned this move for several weeks but only launched it as the halving was underway.
With the “mini” GBTC, Grayscale is ready to go back on the attack. Its existing ETF holds the highest fees in the whole business, at 1.5%, while the Mini version will have the lowest at 0.15%. 10% of the shares from GBTC will be converted to this new product, and current GBTC holders will see a portion of their shares converted too. As an added incentive, Grayscale has managed to secure a tax exemption for these customers, as exchanging products with substantially different fees would generally open a customer up to capital gains taxes. This new product, in other words, has been called a “no-brainer” with no apparent downsides. It’s up to the customers, however, to determine if this new product is ready to meet the challenges of a post-halving world.
It will be very interesting to see if Grayscale has calculated a move like this correctly, and there are still plenty of questions involved. How much of GBTC are they prepared to convert to this mini trust? Will current GBTC holders be persuaded to keep their shares now that they’ve received a gift of such low fees? And how will this product fair on its own when other ETF issuers adapt to the post-halving world themselves? If nothing else, a move like this seems quite ambitious. The Bitcoin ecosystem after the halving has seen entire industries attempt radical new paradigm shifts, with the most diversified businesses seeing a cutting edge over the competition. We’ll have to keep an eye on this new product to see if Grayscale can pull off a big win after a disappointing early performance. If nothing else, a move like this does display real confidence. They may have taken a few hits, but Grayscale still holds a mountain of bitcoin in reserve. It’s hard to count anybody out with a resource like that.
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