Time to Choose: Which Bitcoin ETFs Stand Out in the Early Going, and How Different Are the Winners?

At long last, the U.S. Securities and Exchange Commission (SEC) has approved a handful of applications to launch exchange-traded funds (ETFs) reflecting the spot price of Bitcoin (BTC -1.81%) tokens. Investors now have access to 11 Bitcoin-based ETFs, allowing exposure to the largest cryptocurrency even in account types that don't offer crypto-trading. And there was much rejoicing.

It's still early, but the hopeful field of Bitcoin ETF options has already started separating the wheat from the chaff. Four of the 11 funds stand head and shoulders over the rest with far more trading action and larger Bitcoin portfolios under management one week later.

Each fund offers a unique spin on the idea of Bitcoin-based ETFs. Some of the lagging options may offer interesting features, but their market footprint is too small for proper coverage under The Fool's disclosure policy and general publishing guidelines. Stocks and cryptocurrencies with market caps below $200 million are below the coverage threshold, and the same limit applies to the net asset value (NAV) of ETFs. Most of the new Bitcoin names sit far below that level.

So let's take a deeper look at the four early winners instead. I'm doing this for your benefit, dear reader, but also for my own. Regular readers might recall that I might switch my own Bitcoin-fund holdings currently parked in the just-converted Grayscale Bitcoin Trust (GBTC -1.49%), since that particular option comes with above-average annual fees. So what you're about to read will show you how and why I'd pick an alternative and make the jump -- or not, as the case may be.

The early winners, by the numbers

Data sources: Finviz.com, Yahoo! Finance, and each fund's online home page. Data was collected on Thursday, Jan. 18, 2024.

What's wrong with the Grayscale Bitcoin Trust?

As you can see, Grayscale's fund is far larger than the others. It's the only asset on this list that was converted from a mutual fund format instead of created from scratch last week. As such, it has built up a massive Bitcoin portfolio over the last 11 years.

Grayscale has been fighting for the ETF classification for years, filing the first such application in October 2021. The old mutual fund format lacks the advanced price management features of a modern ETF, so Grayscale's Bitcoin Trust didn't always reflect the true value of its underlying cryptocurrency holdings.

For instance, the fund often traded at a generous premium to its Bitcoin value -- averaging 40% in the 6-year period between 2015 and 2020 -- before swinging to a deep discount in 2021. The fund's price dipped to an average 49% rebate from December 2022 to May 2023, as investors feared that the ETF conversion might never come:

GBTC Discount or Premium to NAV data by YCharts

I built my Grayscale investment by buying in thirds on the outskirts of that ideal period, at discounts ranging from 25% to 40%. An important part of my investment thesis was that the full-fledged ETF would finally match the true market value of Grayscale's substantial Bitcoin holdings, and that's exactly what happened. Over the last 5 market days, the ETF has traded as a minimal discount of roughly 1%.

So far, so good. Now I'm effectively holding a Bitcoin investment in an account that doesn't offer any form of direct cryptocurrency trading. And there was much rejoicing.

But then it turns out that Grayscale's sector-leading ETF also comes with the highest management fees of any Bitcoin ETF. These annual expenses were reportedly a sticking point in negotiations for that precious SEC approval, and the firm agreed to lower its annual fee from 2% to 1.5% just two days before the final approval.

My first thought was to leave my Grayscale investment alone. A 1.5% fee may be high compared to the single-digit rates and even lower introductory fees seen in other Bitcoin ETFs, but it's small potatoes next to the potential gains of a long-term Bitcoin investment. Wouldn't trading fees and capital gains taxes undermine or even overwhelm the savings I'd see from moving to a cheaper option, anyway?

And then it struck me. Like most modern brokerages, my trading platform doesn't charge any fees or commissions on ordinary trades in stocks or ETFs. Furthermore, that basket of Grayscale Bitcoin Trust shares is in a traditional IRA retirement account where taxes are levied on withdrawal and the trades along the way don't incur any additional tax charges.

In other words, I shouldn't let taxation issues limit my efforts to optimize that Bitcoin ETF position. So now I'm leaning toward making that move, squeezing the last drop of available returns from my IRA-based Bitcoin investment.

Goodbye, Grayscale. What are my options?

Grayscale's high management fees may be a mistake since the fund's net asset value has declined in the early going while lower-priced options posted substantial growth instead. Hence, it's time to eat Sir Robin's minstrels and look at the other three winners. Are there any game-changing differences between the iShares, Bitwise, and Ark Invest alternatives?

• The iShares fund comes with a robust early uptake, building nearly a billion-dollar Bitcoin bucket in just a few days. That's hardly surprising, given the iShares series' solid reputation, competitive fees, and financial backing of its parent company, colossal investing services firm BlackRock (BLK 0.69%). Whatever happens to Grayscale over time, the iShares Bitcoin Trust could very well become the go-to choice of Bitcoin ETFs.
• Bitwise's fund offers the lowest fees once all the introductory rebate offers expire. Furthermore, this isn't a financial services firm dabbling in Bitcoin, but a cryptocurrency expert taking a swing at ETFs. I see that as an upside, but your mileage may vary. Bitwise also leans into its cryptocurrency focus by pledging to donate a portion of the ETF's profits to Bitcoin developers. Some critics see this as Bitwise attempting to gain some control over Bitcoin's future direction. I see a helpful effort to support the blockchain infrastructure behind the whole Bitcoin system, which should be a good thing.

  Finally, I kind of expected this firm to manage its own Bitcoin transactions and asset custody, as Fidelity does, but that's not the case. Bitwise leaves that duty to the Coinbase (COIN 5.68%) Custody service -- the same custodian used by every ETF in the table above. Still, low fees and deep cryptocurrency expertise make Bitwise a tempting option.

• Then there's the Ark 21Share fund, managed by Cathie Wood and her team of growth-stock experts. This ETF is barely large enough to merit coverage so far, offering a middle-of-the-road fee schedule and no eye-catching special features. Buying Ark's Bitcoin ETF is essentially a vote of confidence in Cathie Wood's team and its ability to effectively manage a plain-vanilla digital assets ETF in the long run.

So where will I go and what should I recommend for you, dear reader? I'm tempted to reinvest my Grayscale Bitcoin Trust holdings in the Bitwise fund, thanks to its low fees and commitment to supporting the Bitcoin development community. The Ark option was the runner-up for me, as the fund is nearly identical to the iShares alternative but with a lighter fee schedule. In another ETF race, the minimal fees of a Vanguard fund would always be a top choice but that firm sees no value in Bitcoin and won't launch an ETF in this sector anytime soon.

There you have it; I'll probably move my Grayscale investment over to the Bitwise Bitcoin ETF trust in a few days. The disclosure policy I mentioned earlier limits me from buying or selling any of these assets a few days before and after publishing articles about them, so I can't do anything today. You, on the other hand, are free to pick your favorite Bitcoin ETF and grab a few shares, as you might with any normal stock. Again, I'd recommend the Bitwise or Ark 21Share alternatives, depending on whether you crave Bitwise's developer support or not. Both Bitcoin ETFs offer rock-bottom annual fees.

And there was much rejoicing.