How Bitcoin ETFs affected incumbent proxies like MicroStrategy and Grayscale

abdelaziz Fathi

This article addresses whether those wishing to invest in Bitcoin should favor exchange-traded funds (ETFs) over allocating to traditional proxies like MicroStrategy and Grayscale. These established players are facing challenges in convincing investors that they offer a superior alternative.

How Bitcoin ETFs affected incumbent proxies like MicroStrategy and Grayscale

The cryptocurrency investment scene has shaken up with the roll-out of Bitcoin ETFs. This game-changer has redirected attention from traditional investment routes that were once the main paths for both big institutional buyers and retail traders to get into Bitcoin. Key players like MicroStrategy and the Grayscale Bitcoin Trust (GBTC) are feeling the impact. 

Bitcoin ETFs are investment funds that track the price of Bitcoin and are traded on traditional stock exchanges. Unlike buying Bitcoin directly from a cryptocurrency exchange, ETFs offer investors the ease of trading Bitcoin within the framework of a regulated and familiar stock exchange environment. This accessibility and regulatory assurance make ETFs an attractive option for investors who are wary of the complexities and risks associated with direct cryptocurrency investments.

Impact on MicroStrategy

MicroStrategy is a business intelligence company that made headlines in 2020 when it adopted a corporate strategy of investing heavily in Bitcoin. The move was initially seen as a bold endorsement of Bitcoin’s potential, and MicroStrategy’s stock price began to move increasingly in correlation with Bitcoin’s price fluctuations.

But with the arrival of Bitcoin ETFs, a fresh and more straightforward investment avenue emerged for those keen on Bitcoin. ETFs offer similar benefits to what MicroStrategy provides but without the operational risks associated with a company whose primary business is not cryptocurrency. 

Bill Miller IV, the CEO and Chairman of Miller Value Partners, believes that MicroStrategy offers a more appealing investment vehicle for Bitcoin exposure than the newly introduced Bitcoin ETFs. “MicroStrategy has been ahead of the curve in harnessing the potential of Bitcoin, and it represents a better option than a Bitcoin ETF for several reasons,” Miller stated. He added that MicroStrategy is not only more liquid but also free of the management fees typically associated with ETFs.

Miller highlighted the unique position of MicroStrategy as the world’s largest holder of Bitcoin, which provides “optionality” for long-term value creation. “The ability of MicroStrategy’s leadership, especially CEO Michael Saylor who personally holds substantial Bitcoin assets, to navigate this asset class is unparalleled,” he added.

Discussing the practical implications, Miller noted that MicroStrategy’s stock could deviate from Bitcoin’s price due to its operational business in software development. However, he pointed out that this divergence could be advantageous. “If the stock’s price exceeds its intrinsic value, the company could issue more shares and use the proceeds to purchase more Bitcoin, leveraging market conditions effectively,” explained Miller.

Miller also spoke about  the strategic advantages of MicroStrategy under the leadership of CEO Michael Saylor, who he says understands the fundamental and complex math required to increase Bitcoin holdings per shareholder effectively. “MicroStrategy isn’t just a business play; it’s a sophisticated financial engineering feat that leverages the interplay between its stock price and Bitcoin investments to maximize shareholder value,” he concludes.

Despite being fundamentally a software company, MicroStrategy took a unique financial approach by converting its cash holdings into Bitcoin and taking on low-interest debt to amass a large Bitcoin reserve now worth around $14 billion. This approach provides a form of leverage that exchange-traded funds (ETFs) cannot replicate, as ETFs typically do not borrow against their asset appreciation to acquire more of the underlying asset. 

However, the company’s market capitalization is more than $20 billion. This discrepancy highlights a risky valuation relative to its projected $550 million in software sales next year, which alone could be worth around $3.3 billion. 

Grayscale Bitcoin Trust/ETF

Grayscale Bitcoin Trust (GBTC) was another major player that provided investors exposure to Bitcoin through a traditional investment structure. GBTC operated similarly to an ETF but with some differences, particularly in how shares are created and redeemed. Unlike ETFs, GBTC shares can trade at premiums or discounts to the underlying Bitcoin price, depending on market demand.

With the advent of Bitcoin ETFs, GBTC faced competitive pressures, especially since ETFs typically offer lower fees and better liquidity compared to the trust structure. Recognizing these challenges, Grayscale converted GBTC into a true Bitcoin ETF to remain competitive. However, GBTC has seen outflows of over $12 billion since its conversion into an ETF in early January, a trend largely attributed to its above-average fees.

Grayscale also plans to offer more affordable access to its Bitcoin ETF by rolling out a “mini” version of its main product, which will have materially lower fees compared to the original trust. The mini product will be spun off from the Grayscale Bitcoin Trust ETF and will be seeded with an undisclosed amount of Bitcoin that underlies GBTC shares.

With this setup, current GBTC holders can benefit from a reduced total blended fee while maintaining their Bitcoin exposure through shares in both GBTC and BTC. Moreover, existing GBTC shareholders can switch to BTC without incurring capital gains taxes.

MicroStrategy Or Grayscale?

Some investors wonder why one would choose to invest in MicroStrategy when the Grayscale Bitcoin Trust (GBTC) ETF is available. While GBTC accurately tracks Bitcoin’s price and trades on a major exchange, those already owning Bitcoin through cryptocurrency exchanges might find holding GBTC redundant. Instead, they may seek stock-based opportunities related to Bitcoin.

MicroStrategy stands out because of its decision to hold Bitcoin rather than a depreciating asset like cash. While companies such as Tesla, Coinbase, and Marathon Digital Holdings hold a moderate amount of Bitcoin (10,000 to 20,000 BTC), MicroStrategy committed fully and did so strategically. Its average price per Bitcoin is around $35,000, making its current holdings roughly 70% above that price.

Though GBTC is now a Bitcoin ETF, it doesn’t offer the pricing discrepancies that make MicroStrategy a valuable Bitcoin proxy for capitalizing on market peaks and troughs. Additionally, MicroStrategy’s option premiums are high, making it an excellent candidate for the covered call dividend (CCD) strategy.

That said, MicroStrategy’s approach isn’t without its detractors, who caution against the overvaluation of MicroStrategy based on its current Bitcoin holdings and core business performance. The company’s aggressive strategy has led to an estimated overvaluation by about 20%, not factoring in its substantial debt, which, when considered, suggests an overvaluation closer to 30%.

As such, critics argue that converting investments from GBTC to MicroStrategy might not be financially prudent. The underlying concern is that such a move involves selling Bitcoin holdings at a discount only to buy into MicroStrategy at a premium, effectively diminishing the potential returns due to the premium paid over the intrinsic Bitcoin value.

More experts weigh on 

Kevin Huffman, owner of Kriminil Trading, agrees that ETFs provide a convenient, lower-cost option for those seeking Bitcoin exposure without the intricacies of buying and storing coins directly. This setup appeals to those who are inexperienced or have smaller portfolios and prefer a seemingly lower-risk entry point into the market.

Huffman believes that MicroStrategy’s shares still offer an indirect, leveraged investment in Bitcoin. But as Bitcoin ETFs become more enticing to retail investors seeking a straightforward and regulated approach, incumbents will need to rethink their business models and clarify their unique value propositions to maintain their relevance.

Markus Kraus, founder at Trading Verstehen, says that as an online broker, they have seen a major shift in how investors gain exposure to Bitcoin. Spot Bitcoin ETFs are now giving investors a more direct way to invest in Bitcoin itself, so no indirect exposure is needed anymore.

“That said, MicroStrategy still touts some advantages like no management fees and its separate software business providing potential upside. But the new ETFs’ simplicity and low costs are tough to beat for just getting Bitcoin price exposure,” Kraus added.

Jon Morgan, the CEO and Editor-in-Chief of Venture Smarter, points out that it’s crucial to understand that these entities hold different types of assets.

“For iShares, the holdings simply represent a fund that BlackRock has acquired to provide investors with exposure to cryptocurrency. MicroStrategy is different, however, as it has leveraged its cash flows and balance sheet to buy the BTC, with the view of holding for the long-term,” he explains.

According to Nitin Agarwal, CRO and co-founder of FV Bank, there are different profiles of people investing in Bitcoin, each with distinct preferences and approaches. Another segment of investors comprises everyday individuals who may be interested in Bitcoin but would neither want to go to exchanges nor want to engage with companies like MicroStrategy. 

Now, how did ETFs become more relevant, and are they helping MicroStrategy or Grayscale?

“The answer lies in the launch of ETFs, which exposed more people to Bitcoin. Investors found comfort in buying Bitcoin through familiar platforms like investment managers, apps, or banking apps, without needing to alter their habits. The distinguishing factor among various ETFs or ETF providers is the cost of buying Bitcoin. As these investors are typically cost-sensitive, providers offering the lowest commissions are more likely to gain popularity. However, increased exposure to Bitcoin through ETFs often leads to greater awareness among investors. Some of these investors may then explore alternative ways to invest in Bitcoin, whether through secondary or tertiary exposure via companies like MicroStrategy or by directly purchasing and holding Bitcoin on exchanges.”


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