Middleman in Bitcon ETFs

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You think you know about Bitcoin ETFs?

One claim that you sometimes hear about crypto is that it gets rid of middlemen: Instead of relying on a bank to hold your money for you, you can hold it directly on the blockchain. But one reason that crypto is actually popular — a reason that it has gotten a lot of attention, and that a lot of people from the financial and tech industries have gotten into crypto — is that it is insanely lucrative for middlemen. A lot (not all) of the basic products of traditional finance are old and well understood and heavily regulated and fiercely competitive; margins are low and bid/ask spreads are slim. Whereas crypto is relatively new and poorly understood and complicated and illiquid and you can charge 2% on every trade. Sam Bankman-Fried did not briefly become the world’s richest young person because crypto got rid of middlemen. Quite the opposite.

Meanwhile it is probably a positive for crypto if it becomes mainstream, if it is widely adopted by ordinary investors and traditional institutions. That would lead to a lot of money flowing into crypto, which is probably good for the crypto middlemen. On the other hand it would probably lead to a collapse in margins for crypto middlemen: They got fat by charging 2% on every trade, but you can’t do that forever if the product becomes mainstream. Some middlemen may have trouble adapting.

So Bloomberg’s Katie Greifeld reports:

As spot Bitcoin ETF hopefuls rush to file their final documents with US regulators, a key difference is emerging among the applicants in their proposed fee structures.

At the top end: The Grayscale Bitcoin Trust, which would carry a 1.5% fee if the US Securities and Exchange Commission approves its conversion into an exchange-traded fund. While that would be lower than GBTC’s current 2% fee, it comes well above its competitors.

The race-to-the-bottom on fees is a feature of the highly competitive $8 trillion US ETF industry, where even a couple of basis points of difference can translate into millions of dollars worth of inflows.

While GBTC has an enormous advantage in existing assets — it boasts $27 billion in assets as a trust since its 2013 inception — its competitors will charge a fraction of its proposed expense ratio. … BlackRock intends to charge 0.2% for the first year or until it reaches $5 billion in assets, with 0.3% as its eventual fee.

Yeah look the fees for keeping Bitcoins in a pot can be decomposed into: 

  1. There is a cost to actually keeping the Bitcoins in a pot. You gotta worry about custody and security, and set up the trading mechanics for Bitcoins to come in and out of the pot. This costs real money; a spot Bitcoin exchange-traded fund won’t have the near-zero fees of an S&P 500 index fund.
  2. If you are the first person to offer “Bitcoins in a pot” as a product, you can charge a huge premium.

But eventually, like, BlackRock will catch up, and then you probably can’t.