The Concerns Surrounding Low Fees in Spot Bitcoin ETFs
Caitlin Long, the founder of Custodia Bank, is raising concerns about the race among spot Bitcoin Exchange Traded Fund (ETF) issuers in the United States to lower fees to near zero. She advises potential buyers of these regulated products to be cautious about these ultra-low fees as they may indicate hidden risks. Recently, Ark Invest, one of the applicants for a spot Bitcoin ETF, announced a fee of 0.25%, following BlackRock’s move to drop their fees to as low as 0.30%.
Long emphasizes the need for critical analysis when fees are lower than costs. She suggests that prospective clients should inquire about how the asset manager, such as BlackRock or Ark Invest, is making money from managing the fund. In many cases, no-fee funds generate revenue through securities lending, where the ETF lends out the Bitcoin it holds to other investors. However, this exposes investors to the risk that the borrower may not return the Bitcoin.
Furthermore, Long points out that with the possibility of a spot Bitcoin ETF backed by actual Bitcoin being approved by the SEC, ETF issuers holding their coins through Coinbase Custody will have BTC on their balance sheets. She also highlights a disclosure from BlackRock’s latest amendment regarding trust expenses, indicating that clients may still end up paying significant amounts in fees despite low advertised rates.
The Continuation of Fee Competition Amidst a Bitcoin Rally
The desire to attract as many clients as possible may result in a fee war among issuers like BlackRock and Ark Invest, leading them to aggressively compete for an edge by offering low and attractive fees. As we approach the SEC’s January 10 deadline for spot Bitcoin ETF approval, Bitcoin and crypto prices remain strong. On January 9, Bitcoin reached its highest point since March 2022, surpassing $47,200.
Hot Take: Proceed with Caution When It Comes to Low Fees
While the race to lower fees in spot Bitcoin ETFs may seem enticing, it’s important to approach these offerings with caution. Ultra-low fees can indicate hidden risks and potential revenue generation through securities lending. Additionally, even with low fees, clients may still incur significant expenses due to various parties being paid from the trust’s assets. As the SEC considers approving a spot Bitcoin ETF backed by actual Bitcoin, investors should remain vigilant and thoroughly analyze the underlying mechanisms and potential risks associated with these products.
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