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The race to zero fees and the impact of the Terrordome: US spot bitcoin ETF frenzy continues

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Laurent Kssis, CEC Capital and crypto ETP veteran has commented on the fierce competition among ETF issuers in the US to offer the lowest fees for bitcoin ETFs, which are expected to attract what is said to be ‘huge’ inflows from US investors seeking exposure to the leading cryptocurrency.

Described by Bloomberg analyst, Eric Balchunas, as the ‘Terrordome’ as fees for the bitcoin ETFs plummeted, the firm reported that Bitwise, ARK 21Shares and Invesco, had all gone down to a 0.0 per cent fee in the run up to potential launches.

Kssis writes that the break-even point for launching a bitcoin ETF is estimated to be at least USD2 billion per product, which means only the most efficient and reputable issuers can survive in the long run.

“BlackRock, recently filed for a bitcoin ETF, but some analysts believe it is merely a symbolic move to show its capability and interest in the crypto space. They argue that BlackRock would not have entered the race if it had done proper due diligence on the regulatory and operational challenges involved. BlackRock faces stiff competition from other well-known names such as Fidelity, Invesco, and WisdomTree, as well as newcomers like ARK Invest and 21Shares, who have also filed for spot bitcoin ETFs with the SEC.”

BlackRock’s fee is discounted currently from 0.30 per cent to 0.20 per cent.

The crypto world may be in for a surprise as the market has not fully priced in the potential demand surge that a bitcoin ETF approval could trigger, Kssis say.

The CoinShares analysts wrote that bitcoin saw the largest share of inflows at USD113 million with total inflows over the last nine weeks representing 3.2 per cent of AuM.

CoinShares writes that conversely, short-bitcoin saw outflows for the first week of the year totalling USD1 million. “If many truly believed that the launch of the ETF in the US would be a “buy the rumour, sell the news” event, we surely would expect to see inflows into short-bitcoin ETPs, instead, outflows over the last nine weeks have amounted to USD7 million.”

Kssis notes that a bitcoin ETF would offer convenience and security to investors who do not want to deal with the hassle of managing their own private keys or trusting third-party custodians. “It would also enable financial advisers to easily allocate bitcoin to their clients’ portfolios using familiar and trusted platforms. A bitcoin ETF will be a game-changer for the crypto industry, as it would bring more legitimacy, liquidity, and adoption to the nascent asset class.”

However, Kssis warns that not everyone stands to benefit from a bitcoin ETF launch. “The custodians and service providers who support the ETF issuers may not see much revenue growth from their low-margin businesses. According to some estimates, the 13 issuers who have filed for a bitcoin ETF would only generate USD30 million in custody fees and USD200 million in additional trading revenue from the cash creation process in 2024.

“Coinbase, the leading crypto exchange and custodian in the US, may have an edge over its competitors due to its dominant position and existing relationships with many ETF issuers, but it also faces legal risks from a pending lawsuit that could affect its operations.”

Kssis comments that a USD1 billion inflow into a bitcoin ETF with a 0.25 per cent fee would only produce USD2.5 million in annual revenue for the issuer. This is a negligible amount compared to the legal and operational costs involved in launching and maintaining a bitcoin ETF.

“Moreover, this is a tiny fraction of the European ETP market, where the largest bitcoin product, BTCE, has over USD1.3 billion in assets and charges a 2 per cent fee, generating USD20 million in revenue for its issuer, ETC Group.”

Kssis says that the US market has effectively killed the revenue game in management fees for bitcoin ETFs, as issuers race to the bottom to gain market share and approval from the SEC.

“This means that European issuers will have to lower their fees or offer better value propositions to remain competitive and profitable. The US market may also set the tone for other jurisdictions that are considering or have already approved bitcoin ETFs, such as Canada, Brazil, and Dubai.”

In conclusion, Kssis writes that the short-term outlook for the crypto market is bullish, as a bitcoin ETF approval could spark a rally with high volatility. “However, the market may also face a correction as the halving effect, which reduces the supply of new bitcoins, comes into play in April/May. The long-term trend, however, is positive, as a bitcoin ETF would increase the adoption and innovation of the crypto industry.”

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