Outflows from Grayscale bitcoin ETF hit $1.9 billion in single week

By Suzanne McGee and Hannah Lang

(Reuters) - Grayscale Bitcoin Trust recorded $1.9 billion in outflows last week, tipping the group of U.S. spot bitcoin exchange-traded funds (ETFs) into net outflows for the week ending March 22, according to data from BitMEX Research.

While there has been buying interest in new funds from BlackRock, Fidelity Investments and others since the U.S. Securities & Exchange Commission approved the new cryptocurrency ETFs in January, it was not enough to offset selling by Grayscale holders last week, the data showed.

Inflows to the other nine ETFs launched at the same time as Grayscale's fund converted also slowed last week as the price of bitcoin was muted compared with highs it notched earlier this month.

Grayscale's outflows have been due to fees significantly higher than those of its rivals, as well as selling by bankruptcy trustees, analysts said.

Bryan Armour, an ETF analyst at Morningstar said that Grayscale opted to keep the management fee on its converted ETF at 1.5%, compared with 0.25% for the BlackRock fund and even lower, including fee waivers, at rivals.

A spokesperson for Grayscale said that its team anticipated that strategies like profit-taking and arbitrage as well as selling by bankruptcy trustees to satisfy creditors of FTX and others would lead to net outflows. Grayscale CEO Michael Sonnenshein told CNBC last week the firm will cut fees on its flagship fund "over time."

In contrast to Grayscale's outflows, assets at BlackRock's iShares Bitcoin Trust have witnessed the most dramatic gains, reaching the $10 billion mark on March 1, according to data from Morningstar and TrackInsight. Last week, its inflows totaled $828.3 million, down from $2.48 billion for the week ended March 15, according to data from BitMEX Research.

BlackRock could not immediately be reached for comment.

Grayscale has seen other challenges. Last week, Wealthfront, a digital wealth management provider, said it would replace Grayscale's ETF with the iShares fund as an alternative, citing its low fee and high average daily trading volumes.

"Thinking about that all-in cost of expense ratio and how much it actually costs to buy and sell in terms of bid-ask spread, we thought that IBIT was the most attractive overall," said Alex Michalka, Wealthfront's vice president of investment research.

After soaring as much as 16% earlier this year, bitcoin remains about 9% below its peak, recorded only two weeks ago. Gains on the ETFs mirror that price action.

"Any time an asset reaches all-time highs tends to produce profit-taking" or at least a lull in the pace of buying, said Adam Sze, head of digital assets product for Global X, an ETF provider.

The key to reviving bitcoin ETF flows may prove to be not only a more stable price but also more signs of interest by institutional investors.

So far, "most of the trading activity has been dominated by individual investors and perhaps a few hedge funds," said Kyle Da Cruz, director of digital assets product at VanEck, which has its own bitcoin ETF competing for a share of those increasingly-scarce inflows.

"This is still a nascent asset class, and one where the 'stickier' money" has yet to enter, he said.

(Reporting by Suzanne McGee and Hannah Lang, editing by Megan Davies and Marguerita Choy)