Less than a month after the introduction of spot Bitcoin exchange-traded funds (ETFs), the asset managers behind these investment vehicles are already exploring ways to enhance their profitability. Valkyrie Investments announced on Thursday its decision to retain BitGo as a secondary custodian, augmenting Coinbase’s dominant position in custody services for Bitcoin ETFs. Valkyrie Bitcoin Fund, valued at approximately $113 million and trading under the BRRR ticker, is among the ETFs under the custody of Coinbase.
Steven McClurg, chief investment officer of Valkyrie, highlighted the importance of mitigating risk by having multiple custodial options to safeguard client assets. McClurg stated, “We think it’s prudent to have multiple options and to make sure we are mitigating risk in a proper way on behalf of our clients.”
Apart from risk mitigation, maintaining relationships with multiple custodians enables ETF issuers to potentially negotiate lower fees in the future, thereby enhancing profitability. The recent fee cutting war among ETFs, preceding the January 11 launches, underscores the competitive landscape in the market.
Custody rates typically range from 10 to 50 basis points, depending on the size of the client and additional services utilized, according to industry officials. Gavin Michael, CEO of Bakkt Holdings Inc., emphasized the significance of custody platform costs and trading spreads in determining ETF prices.
BitGo, along with other custodians such as Gemini, Anchorage Digital, and Kraken, is engaging with Bitcoin ETF issuers to serve as secondary custodians. Adam Sporn, head of prime brokerage at BitGo, expressed his expectation that most ETFs will adopt multiple custodians in the coming quarter.
For custodians able to achieve scale, even relatively small fees from ETFs could translate into significant profits. The recent inflow of several billion dollars into US spot Bitcoin ETFs underscores the potential for custodians to capitalize on this growing market. Kraken, for instance, plans to launch a new institutional custody product this quarter, capitalizing on its expertise and existing indices provision.
Despite the emergence of secondary custodians, Coinbase remains confident in retaining a substantial share of ETF assets. Philip Martin, chief security officer at Coinbase, emphasized the firm’s integrated offerings, combining trading and custody services to facilitate fast settlement and trading for ETF issuers.
As competition intensifies in the Bitcoin ETF market, custodians are strategically positioning themselves to capitalize on the growing demand for digital asset investments, while ETF issuers seek to optimize their operational efficiency and profitability amidst evolving market dynamics.
