Why do institutions prefer Bitcoin ETFs to buying BTC directly?

For Bitcoin to truly gain institutional adoption, all it takes is the introduction of a risk-minimized, easy-to-use exchange-traded fund (ETF) product. In January, the U.S. Securities and Exchange Commission approved nine new ETFs for investing in Bitcoin through the spot market, a vast improvement over the futures ETFs that began trading in 2021. The size and volume of institutional allocations to these ETFs exceeded consensus estimates in first-quarter trading. BlackRock’s ETF alone set a record for the shortest time for an ETF to reach $10 billion in assets.

In addition to the eye-popping AUM numbers for these ETFs, last Wednesday was the deadline for institutions with more than $100 million in assets to report their holdings to the SEC via 13F filings. The documents reveal the complete picture of who owns a Bitcoin ETF — and the results are nothing short of optimistic.

Wide Institutional Adoption

In the past few years, if an institutional investor reported owning Bitcoin, it would become a news event and even shake up the market. Just three years ago, Tesla decided to add Bitcoin to its balance sheet, causing Bitcoin to rise by more than 13% in one day.

2024 is clearly different. As of Wednesday, we now know that 534 independent institutions with over $1 billion in assets have chosen to begin allocating Bitcoin in the first quarter of this year. From hedge funds to pension funds and insurance companies, the breadth of Bitcoin adoption is impressive.

Source: River

More than half of the 25 largest hedge funds in the United States now hold Bitcoin, most notably $2 billion position held by Millennium Management. Additionally, 11 of the largest 25 registered investment advisers (RIAs) now also hold Bitcoin.

Source: River

Why are Bitcoin ETFs so attractive to institutions that are just buying Bitcoin?

Large institutional investors have been slow to move, coming from a financial system entrenched in tradition, risk management and regulation. Pension funds updating their portfolios require months or even years of committee meetings, due diligence and board approvals, often repeated multiple times.

Gaining exposure to Bitcoin by buying and holding real Bitcoin requires a comprehensive review of multiple exchange providers (such as Galaxy Digital), custodians (such as Coinbase), and forensic services (such as Chainalysis) , In addition, new accounting and risk management processes must be developed.

In contrast, gaining exposure to Bitcoin is easy by purchasing an ETF from Blackrock. As Lyn Alden said on the TFTC Podcast, "From a developer's perspective, ETFs are basically an API to the fiat system. It just allows the fiat system to plug into Bitcoin better than before."

That's not to say that ETFs are the ideal way for people to get exposed to Bitcoin. In addition to the management fees that come with owning an ETF, this product comes with a number of trade-offs that could undermine the core value that Bitcoin offers—a currency that cannot be bought. While these trade-offs are beyond the scope of this article, the flowchart below describes some factors to consider.

Why didn’t Bitcoin rise further this quarter?

With ETF adoption so high, it might be surprising that Bitcoin’s price is only up 50% year-to-date. In fact, if 48% of top hedge funds now have allocations to this fund, how much upside is really left?

While ETF holdings are broad, the average allocation of institutions that hold these ETFs is quite limited. Among large ($1 billion+) hedge funds, RIAs, and pensions that have made allocations, the weighted average allocation is less than 0.20% of AUM. Even Millennium's $2 billion allocation represents less than 1% of its reported 13F holdings.

As a result, the first quarter of 2024 will be remembered as the period when institutions “emerged from zero.” As for when they will get out of testing the waters? Only time will tell.

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