In hindsight, all it took for true institutional adoption of Bitcoin was the introduction of an easy-to-use, low-risk product in the form of an exchange-traded fund (ETF). In January, the Securities and Exchange Commission approved nine new ETFs that provide exposure to bitcoin through the spot market, a strict improvement over futures-based ETFs that began trading again in 2021. In the first quarter of trading, Size and number of institutional allocations. These ETFs have blown away consensus expectations. Blackrock's ETF alone set a record for the shortest period in which ETF assets reached $10 billion.
In addition to the AUM numbers drawn by these ETFs, last Wednesday set the deadline for institutions with more than $100 million in assets to report their holdings to the SEC through 13F filings. These filings reveal a complete picture of who owns Bitcoin ETFs – and the results are nothing less than positive.
Widespread institutional adoption
In years past, a single institutional investor reporting ownership of Bitcoin would have been a newsworthy, even market-moving, event. Just three years ago, Tesla's decision to add Bitcoin to its balance sheet caused the price of Bitcoin to rise more than 13% in a single day.
Clearly, 2024 is different. As of Wednesday, we now know that 534 unique institutions with over $1 billion in assets have chosen to begin allocating to Bitcoin in the first quarter of this year. Ranging from hedge funds to pensions and insurance companies, the breadth of adoption is notable.
Of the 25 largest US hedge funds, more than half are now exposed to bitcoin, most notably a $2 billion position from Millennium Management. In addition, 11 of the 25 largest registered investment advisors (RIAs) are now designated.
But why are Bitcoin ETFs so attractive to institutions that could have just bought Bitcoin?
Large institutional investors are slow-moving creatures of a financial system steeped in tradition, risk management and regulation. For a pension fund to modernize its investment portfolio, it requires months, sometimes years, of committee meetings, due diligence, and board approvals that are often repeated multiple times.
Exposure to Bitcoin by purchasing and holding real Bitcoin requires thorough vetting of multiple trading providers (such as Galaxy Digital), custodians (such as Coinbase), and forensic services (such as Chaina Analysis), as well as the formation of new accounting and risk management processes. etc.
Getting exposure to Bitcoin by buying an ETF from Blackrock is easy by comparison. As said by Lynn Alden on TFTC Podcast“All ETFs, in developer terminology, are essentially an API to the fiat system. They just allow the fiat system to interface to Bitcoin a little better than it was before.”
This doesn't mean that ETFs are the ideal way for people to learn about Bitcoin. In addition to the management fees that come with owning an ETF, there are many trade-offs that come with such a product that may compromise the fundamental value that Bitcoin provides in the first place – incorruptible money. While these trade-offs are beyond the scope of this article, the flowchart below depicts some influential considerations.
Why didn't Bitcoin rise more this quarter?
With such a strong rate of ETF adoption, it may come as a surprise that Bitcoin's price is only up 50% year to date. Indeed, if 48% of the largest hedge funds are now allocated, how much upside is there really left?
While ETFs have broad ownership, the average allocations to institutions that own them are very modest. Among the major hedge funds ($1 billion+), RIFs, and pensions that have made an allocation, the weighted average allocation is less than 0.20% of assets under management. Even Millennium's $2 billion allocation represents less than 1% of its reported 13F holdings.
Thus, the first quarter of 2024 will be remembered as the time when organizations “came out of the ground.” When will they move beyond dipping their toes in the water? Only time will tell.
This is a guest post by Sam Baker from River. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
