Morgan Stanley Bitcoin ETF adds Fidelity and offers 5B fee waiver

Morgan Stanley prepares to launch its own Bitcoin ETF and offer a fee discount on the first $5 billion to attract investors and compete with other ETF firms. 

The investment bank filed an updated S-1 form with the U.S. Securities and Exchange Commission (SEC), explaining how the ETF will work as it prepares to list on NYSE Arca.

Morgan Stanley adds new partners and offers incentives to make its Bitcoin ETF more attractive

Morgan Stanley will list its new Bitcoin ETF on the NYSE Arca market under the ticker name “MSBT,” allowing traders to buy, monitor, and sell it anytime the market opens. Furthermore, the financial services company designed the ETF to keep expanding for up to three years as more investors join, unless the firm decides to extend the period. 

Additionally, Morgan Stanley added Fidelity as a custodian, alongside Bank of New York Mellon and Coinbase Custody Trust Company, to strengthen the system and make it more reliable for investors. 

Similarly, the American multinational investment bank aims to attract more investors quickly, especially large institutions such as funds and organizations, by waiving fees on the first $5 billion invested in the ETF.

However, while lower fees may help the ETF compete with big players like BlackRock that already offer Bitcoin ETFs, the firm has yet to share the long-term fee it will charge once the waiver ends.

Behind the scenes, Morgan Stanley serves as the delegated sponsor for the Bitcoin ETF, while Bank of New York Mellon serves as both the administrator and transfer agent, keeping everything running smoothly.

Because financial products must follow strict guidelines when made public, Foreside Fund Services will act as the marketing agent, reviewing and approving marketing materials to ensure they are within the rules.

On top of that, the ETF has trustees, including CSC Delaware Trust Company and AGS Trustees Limited, both based in the Cayman Islands, who will oversee the trust’s structure and ensure compliance with legal requirements.

Furthermore, firms like Virtu Americas, Jane Street, and Macquarie Capital will create and redeem ETF shares to keep the price close to Bitcoin’s actual cost and provide liquidity, so trading goes smoothly.

Morgan Stanley is also building its own systems for Bitcoin custody and trading, and exploring new services such as yield and lending to help investors earn more from their crypto lending. 

The ETF tracks Bitcoin’s price and uses a simple investment strategy

Morgan Stanley’s Bitcoin ETF uses a pricing system called the CoinDesk Bitcoin Benchmark to monitor Bitcoin prices across major exchanges, combine them into a single price, and publish a final price at a specific time (around 4 PM in New York). The system is easier to understand because the fund simply holds Bitcoin and lets the price move on its own rather than guessing when Bitcoin will rise or fall.

Similarly, the fund avoids leverage, derivatives, and active trading strategies by owning Bitcoin directly instead of using contracts or bets on future prices.

Along with this, the fund divides the value of its Bitcoin into shares that people can trade on the market, whose prices change based on supply and demand. The ETF also calculates the Net Asset Value (NAV) every day to provide investors with clear pricing. 

When it comes to creating and removing shares, the ETF keeps the process organized and efficient by issuing shares in blocks called “baskets,” each containing 10,000 shares. 

Morgan Stanley creates shares in two ways.  The first method is in-kind creation, where an investor or a large financial firm delivers real Bitcoin to the fund in exchange for shares of the ETF. The second method is cash creation: the investor provides cash instead of Bitcoin; a third-party firm uses that cash to buy Bitcoin and deposit it into the fund; and the ETF issues shares to the investor. Investors can also return their shares and choose either cash or Bitcoin.

The system is called a hybrid model because it allows both cash and in-kind transactions, but the flexibility also means there can be small price differences when buying and selling (slippage). The downside is that the risk falls on the authorized participants, which are the large firms that handle these transactions.

These authorized participants prevent the ETF from drifting too far from Bitcoin’s actual value by creating and redeeming shares, and they work with counterparties that serve as bridges between cash and Bitcoin.

Behind the scenes, the fund stores Bitcoin in cold storage to prevent cyberattacks, and the system uses multiple layers of protection, such as using multiple private keys instead of just one, whitelisting, and two-factor authentication.

However, there are still limits because the custodians’ insurance is shared across many clients and may not fully cover all losses. Similarly, FDIC insurance does not protect Bitcoin held in the fund, as is the case with bank deposits.

Furthermore, the ETF is planning a seed investment of 50,000 shares, worth about $1 million, to start trading with some value already built in, but it comes with risks, such as hacking, theft, or network technical issues, as well as the extreme volatility of Bitcoin.

The price of shares may also fail to reflect the actual value of Bitcoin, making trading more difficult than it should, while using cash can reduce the effectiveness of arbitrage.

What’s more, the ETF still needs SEC approval, and investors may need to pay taxes even if they do not receive cash.

Morgan Stanley manages about $1.9 trillion in assets and oversees around $9 trillion in client assets, but competition is also strong, as more than 100 crypto ETF applications are still awaiting approval. 

However, MSBT stands out from the rest because it combines strong custody partners, fee incentives, and a full institutional setup, making it more likely to succeed.