Institutional Adoption Fueled by Bitcoin ETFs
PUBLISHED WED, JUN 13 2024
By: Mr-Falcon
The introduction of risk-minimized, user-friendly Bitcoin exchange-traded funds (ETFs) has significantly advanced institutional adoption of Bitcoin. In January, the SEC approved nine new ETFs that offer exposure to Bitcoin through the spot market, a notable improvement over the futures-based ETFs that commenced trading in 2021. In the first quarter, both the size and number of institutional investments in these ETFs have far exceeded consensus expectations. BlackRock’s ETF, in particular, set a record by reaching $10 billion in assets in the shortest time ever for an ETF.
Impressive Institutional Holdings
Beyond the impressive assets under management (AUM) figures, last Wednesday marked the reporting deadline for institutions with over $100 million in assets to disclose their holdings to the SEC via 13F filings. These filings provide a comprehensive overview of Bitcoin ETF ownership, and the results are overwhelmingly positive.
Broad-Based Institutional Adoption
In the past, a single institutional investor reporting Bitcoin ownership would have been a significant, market-moving event. For example, Tesla's decision to add Bitcoin to its balance sheet three years ago resulted in a 13% increase in Bitcoin's price in a single day.
The landscape in 2024 is markedly different. As of Wednesday, 534 unique institutions with over $1 billion in assets began allocating to Bitcoin in the first quarter of this year. These institutions range from hedge funds to pensions and insurance companies, demonstrating a remarkable breadth of adoption.
Among the largest 25 hedge funds in the US, more than half now have exposure to Bitcoin, including a notable $2 billion position from Millennium Management. Additionally, 11 of the largest 25 Registered Investment Advisors (RIAs) have made allocations.
The Appeal of Bitcoin ETFs to Institutions
Large institutional investors are traditionally slow to change due to stringent risk management, regulatory frameworks, and established investment practices. Updating a pension fund’s investment portfolio, for example, can take months or even years of committee meetings, due diligence, and board approvals.
Directly purchasing and holding Bitcoin involves extensive vetting of trading providers (such as Galaxy Digital), custodians (like Coinbase), and forensics services (such as Chainalysis), along with the formation of new processes for accounting and risk management.
Conversely, gaining Bitcoin exposure through a BlackRock ETF is considerably simpler. As Lyn Alden explained on a TFTC podcast, "All the ETF is, is in developer terms, it's basically an API for the fiat system. It just allows the fiat system to plug into Bitcoin a little bit better than it used to."
While ETFs are not the ideal method for everyone to gain Bitcoin exposure due to management fees and potential trade-offs, they provide a convenient entry point for institutions.
Modest Bitcoin Price Movement Despite High ETF Adoption
Despite the strong rate of ETF adoption, Bitcoin’s price has only increased by 50% year-to-date. With 48% of the top hedge funds now allocated to Bitcoin, one might wonder how much upside remains.
The broad ownership of these ETFs is accompanied by relatively modest average allocations. Among the major ($1 billion+) hedge funds, RIAs, and pensions, the weighted average allocation is less than 0.20% of AUM. Even Millennium’s $2 billion position represents less than 1% of their reported 13F holdings.
Conclusion
The first quarter of 2024 will be remembered as the period when institutions began to allocate to Bitcoin. Whether they will move beyond initial, modest allocations remains to be seen.
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