Why do institutions prefer Bitcoin ETFs rather than buying BTC directly?

For Bitcoin to truly gain institutional adoption, all it will take is the introduction of an exchange-traded fund (ETF) product that minimizes risk and is easy to use. In January, the SEC approved nine new ETFs that invest in Bitcoin through the spot market, a big improvement over the futures ETFs that began trading in 2021. In the first quarter of trading, these ETFs saw institutional allocations in size and volume that exceeded consensus expectations. 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. These filings reveal a complete picture of who owns the Bitcoin ETFs — and the results are nothing short of bullish.

Widely adopted by institutions

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's decision to add Bitcoin to its balance sheet caused Bitcoin to rise by more than 13% in a single day.

2024 is clearly different. As of Wednesday, we now know that 534 independent institutions with more than $1 billion in assets chose to start allocating to Bitcoin in the first quarter of this year. From hedge funds to pension funds and insurance companies, the breadth of Bitcoin adoption is remarkable.

Source: River

More than half of the 25 largest U.S. hedge funds now hold Bitcoin, with the most notable being Millennium Management’s $2 billion position. Additionally, 11 of the 25 largest registered investment advisors (RIAs) now hold Bitcoin.

Source: River

Why is a Bitcoin ETF so attractive to institutions that are just starting to buy Bitcoin?

Large institutional investors are slow to act, coming from a financial system entrenched in tradition, risk management and regulation. It takes months or even years of committee meetings, due diligence and board approvals for pension funds to update their portfolios, often multiple times.

Getting exposure to Bitcoin by buying and holding real Bitcoin requires a comprehensive review of multiple exchange providers (e.g., Galaxy Digital), custodians (e.g., Coinbase), and forensic services (e.g., Chainalysis), in addition to developing new accounting, risk management processes, etc.

In contrast, it’s easy to get exposure to Bitcoin by purchasing an ETF from Blackrock. As Lyn Alden said in the TFTC podcast, “From a developer’s perspective, an ETF is basically an API to the fiat system. It just makes the fiat system more accessible to Bitcoin than it was before.”

This is not to say that an ETF is the ideal way for people to gain exposure to Bitcoin. In addition to the management fees that come with owning an ETF, such a product would come with many 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 of the factors to consider.

Why hasn’t Bitcoin risen further this quarter?

With ETF adoption so high, it may be surprising that the price of Bitcoin is only up 50% year to date. In fact, if 48% of the top hedge funds are now allocated to the fund, how much upside is really left?

While the range of ETF holdings is broad, the average allocation of institutions holding them is quite limited. Among the 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.

Therefore, the first quarter of 2024 will be remembered as the period when institutions “came out of zero.” As for when they will finally get out of the water testing phase? Only time will tell.