The US Securities and Exchange Commission (SEC) made a rare compromise this month and approved the listing of a Bitcoin spot ETF for the first time in history, bringing the digital currency to a milestone. The reason behind this is Grayscale Investments (Grayscale Investments), an important player in the digital currency market.

In August of last year, Grayscale won a key lawsuit against the US SEC. The Washington DC Circuit Court of Appeals ruled in the ruling that the SEC approved the decision to approve a Bitcoin futures ETF, while rejecting Grayscale's decision to convert GBTC to a spot Bitcoin ETF was “arbitrary and capricious.”

The court's ruling kicked off a sharp rise in cryptocurrencies, as people speculated that the US SEC would eventually have to make compromises to give the green light to the growing demand for spot Bitcoin ETFs. This is indeed the case. Recently, SEC Chairman Gary Gensler said that last year's court ruling forced the SEC to make changes and finally approve the listing of spot Bitcoin ETFs.

However, Grayscale, the leader, and its spot Bitcoin ETF GBTC, is facing significant capital outflows. According to media data, since the Grayscale Bitcoin Trust turned into an ETF on January 11, there was an outflow of $2.8 billion as of last Friday. The remaining nine newly listed spot Bitcoin ETFs attracted a total of around $4 billion in capital inflows, of which BlackRock and Fidelity Investments each attracted more than $1 billion. However, Grayscale's GBTC is still the largest, reaching US$22.9 billion.

The reason for the large-scale outflow of capital to gray is closely related to its high fees. Currently, Bitcoin ETF issuers are fiercely competitive and are cutting fees one after another to attract investors. Although Grayscale reduced its management fee from 2% to 1.5%, it is still several times higher than other competitors, and some issuers even offered big promotions with zero management fees in the first few months of the Bitcoin ETF listing. Grayscale's CEO said the 1.5% rate is reasonable given the fund's liquidity, minimal spread, and good track record over the past decade.

But in the face of such high fees, why do so many investors still hold GBTC? One important reason is taxes:

The predecessor of GBTC was the Bitcoin Trust. This trust fund was first established in 2013. It is a way for investors to invest in Bitcoin without having to directly buy and hold Bitcoin. However, in the case of Bitcoin trusts, investors cannot easily exchange for Bitcoin, so there will be premium or discount transactions relative to the underlying asset.

Since the beginning of 2021, GBTC Bitcoin Trust has been trading at increasingly higher discounts, reaching a discount peak of nearly 50% in December 2022. After GBTC was converted to an ETF, its discount was reduced to close to 0.

Many investors holding GBTC are likely to be heavily profitable, especially those who bought when GBTC was at a huge discount. They not only received the rise in Bitcoin since last year, but also received additional profits from the elimination of the discount. This is probably where Grayscale dared to charge the most expensive management fee in the industry.

Since the Bitcoin Spot ETF was listed on January 11, Bitcoin has broken out of the classic “selling fact” trend. On Tuesday, digital currencies fell again. Ether fell more than 6% in 24 hours, Bitcoin also fell about 2%, and fell below 39,000 US dollars during the intraday period.

According to J.P. Morgan analysts, investors profiteed after the GBTC price increase and turned to lower-fee competitors, which dragged down the cryptocurrency market.

Another important reason is that Wall Street saw the FTX sell-off mentioned yesterday. Coinglass's data shows that since the launch of the Bitcoin ETF, the amount of Bitcoin long position liquidations has been quite impressive, but Tuesday's data was significantly lower, indicating that the initial sell-off may be slowing down.

Peter Schiff, a well-known American financial critic, dismisses it, saying:

The new Bitcoin ETF didn't create additional demand; it just changed demand. Investors who may have bought actual Bitcoin or Bitcoin-related stocks have just switched to new ETFs. Rearranging the loungers won't stop the boat from sinking.

Editor/Somer