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The launch of Bitcoin ETFs earlier this year was a gamechanger for many investors. Cryptocurrency had always been too risky for risk-averse stock traders like myself, and ETFs offered peace of mind. That said, not all funds instilled me with confidence. It doesn’t matter what the asset class is, AUM’s under $100M, poor liquidity and little known fund sponsors put me off. Thankfully, the iShares Bitcoin Trust ETF (NASDAQ:IBIT) was one of the funds launched in January, and it ticks all the boxes.
Introducing IBIT
IBIT is sponsored by BlackRock, which is “the world’s largest ETF manager by AUM, managing $3.5T in global ETF investment vehicles as of December 31, 2023.” The BlackRock iShares range of ETFs covers just about any investment theme you could think of. While they vary greatly in terms of quality and performance, they are the household name in ETFs, ubiquitous and reliable.
That all said, we should still do our own research into the safety aspects of the fund. As FTX showed us, nothing is too big to fail.
Safety
The prospectus details the arrangements for holding its Bitcoin with a custodian, Coinbase Custody Trust Company, LLC.
The Bitcoin Custodian keeps custody of all of the Trust’s bitcoin in segregated accounts in the Vault Balance, other than the Trust’s bitcoin which is temporarily maintained in the Trading Balance with the Prime Execution Agent as described below in “—The Prime Execution Agent.”
…The Bitcoin Custodian keeps all of the private keys associated with the Trust’s bitcoin held at the Bitcoin Custodian in the Vault Balance in cold storage.
Cold storage is a safeguarding method by which the private key(s) corresponding to bitcoin is (are) generated and stored in an offline manner. Private keys are generated in offline computers or devices that are not connected to the internet so that they are more resistant to being hacked.
It sounds safe enough, but nothing is guaranteed. Later on in the prospectus, there is a warning,
… the security procedures cannot guarantee the prevention of any loss due to a security breach, software defect or act of God that may be borne by the Trust and the security procedures may not protect against all errors, software flaws or other vulnerabilities in the Trust’s technical infrastructure, which could result in theft, loss or damage of its assets.
There is some insurance on the assets, but not nearly enough to cover the AUM.
Coinbase Global maintains a commercial crime insurance policy of up to $320 million, which is intended to cover the loss of client assets held by Coinbase Insureds, including from employee collusion or fraud, physical loss including theft, damage of key material, security breach or hack, and fraudulent transfer. The insurance maintained by Coinbase Global is shared among all of Coinbase’s customers, is not specific to the Trust or to customers holding bitcoin with the Bitcoin Custodian or Prime Execution Agent and may not be available or sufficient to protect the Trust from all possible losses or sources of losses.
The potential for hacks or other losses do seem low given the cold storage of keys, but clearly some risks remain and investing in Bitcoin ETFs is different than investing in stocks or equity ETFs. Most Bitcoin ETFs use Coinbase as a custodian, so the same risks are inherent. However, Fidelity uses an in-house custodian for its Fidelity Wise Origin Bitcoin Fund ETF (FBTC).
Expenses
IBIT has already accumulated AUM of $19B, eclipsing all other Bitcoin ETFs. It trades on average nearly 28M daily shares, which is multiples higher than its peers.
The expense ratio started at 0.12% when the fund was launched in January 2024 and will rise to 0.25% in January 2025. Currently, the fee is a mix of 0.12% on the first $5B AUM and 0.25% on AUM above $5B. As per the fund page,
If the fund exceeds $5.0 billion of the Trust’s assets prior to the end of the 12-month period, the Sponsor’s Fee charged on assets over $5.0 billion will be 0.25%. All investors will incur the same Sponsor’s Fee which is the weighted average of those fee rates. After the 12-month waiver period is over, the Sponsor’s Fee will be 0.25%.
With a YTD price change in Bitcoin of over 60%, the fractions of percent in the expense ratios make little difference. However, I like to know I am not throwing away money and IBIT compares favorably to other funds, especially Grayscale (GBTC) with its exorbitant 1.50% expense. FBTC has waived its expenses for a limited period to the end of July, when it will become 0.25%.
Price Behaviour
Another consideration is whether IBIT actually correlates closely to Bitcoin spot prices. As shown below, there are periods where there is a premium / discount, but these are brief as the fund seeks to minimize these by arbitraging with Baskets of 40,000 shares.
Buying at a discount is always desirable, but you would have to be lucky to catch a discount of over 1%. For the most part, IBIT follows Bitcoin spot prices very closely.
Bitcoin Forming a Bullish Pattern
IBIT ticks all the boxes I would look for in a Bitcoin ETF – safe, liquid, low expenses and a stable correlation. It may be a good time to buy, as Bitcoin is forming a bullish technical pattern called a cup and handle. This forms when a rally consolidates around the previous highs to create a “handle” to set up a break-out.
Cup and Handle Pattern (Investopedia)
The pattern is quite clear on the Bitcoin chart.
Bitcoin Daily Chart (Tradingview)
Bitcoin has been consolidating for over 3 months now, and while it could continue in a sideways pattern for longer, it may be about ready to break out to new all-time highs. I prefer to buy a dip during the low volatility consolidation rather than chase the break-out when prices are already much higher. I therefore think IBIT is a buy around the current price of $35.
Conclusions
IBIT is the largest Bitcoin by ETF from the largest ETF provider. It is about as safe as you can get in this space, but still has some additional risks compared to stock and equity ETFs due to the necessity to store its large holdings in Bitcoin with a custodian. Its low expense ratio compares well to its peers, and this is my preferred Bitcoin ETF, followed in second place by FBTC. I currently rate IBIT a “buy” as Bitcoin is consolidating its gains in a bullish pattern that appears to be setting up a break-out to new all-time highs.