Institutional Accumulation and the Rapid Growth of Bitcoin ETFs
One of the most critical questions in the cryptocurrency world today is whether institutions and professional investors will significantly allocate funds to cryptocurrencies. This question is more crucial than the outcome of presidential elections, the prospects of crypto legislation in Congress, or the development of blockchain technology.
Why is this so important? The data speaks for itself.
The majority of the world’s investment assets are held by professionals. Research indicates that institutions control about 80% of the U.S. securities market. In contrast, institutional holdings of cryptocurrencies are minimal. The most aggressive estimates suggest that institutions might hold only around 10% of the total Bitcoin supply.
Imagine if institutions aimed to hold 50% of the market share—they would need to purchase approximately $500 billion worth of Bitcoin. Undoubtedly, this would have a massive impact on Bitcoin’s price.
But the key question is: will they buy?
Following the launch of Bitcoin ETFs, the U.S. Securities and Exchange Commission (SEC) requires institutions to disclose their ETF holdings quarterly through 13F filings. Based on this data, we can now answer this question. The latest batch of 13F filings, covering the second quarter of 2024, was released last week and revealed some interesting insights. Here are three key takeaways:
Insight 1: Institutions Are Actively Buying Bitcoin ETFs
The most significant finding is that institutions continued to buy Bitcoin ETFs in the second quarter.
Despite a 12% decline in Bitcoin’s price during Q2 2024, institutional investors did not shy away. The number of institutional investors holding Bitcoin ETFs increased by 14% quarter-over-quarter, rising from 965 to 1,100.
Their share of the total assets under management (AUM) in Bitcoin ETFs also grew from 18.74% to 21.15%, with retail investors holding the remaining 79%. Overall, institutions held $11 billion worth of Bitcoin ETFs at the end of the quarter.
The flow of funds was healthy, with 112 investors selling their Bitcoin ETF holdings from the previous quarter, while 247 new companies made their first investment. In total, Bitcoin ETFs gained 135 new institutional investors.
In my view, this is a positive sign. If institutions are buying Bitcoin during periods of price volatility, it’s hard to imagine how they will react in a bull market.
Insight 2: Bitcoin ETFs Are Being Adopted at Unprecedented Speeds
Critics often argue that Bitcoin ETFs are primarily held by retail investors, who account for about 79% of Bitcoin ETF AUM, indicating weak institutional demand.
This is entirely incorrect. The adoption of Bitcoin ETFs by institutions is happening at the fastest pace in ETF history.
I studied the institutional holdings of the top 10 fastest-growing ETFs of all time, based on their AUM one month after launch. Specifically, I analyzed the number of institutional holders and total institutional AUM two quarters after their listing and compared them to the current Bitcoin ETF holdings.
The adoption speed of these 10 ETFs pales in comparison to Bitcoin ETFs. The closest competitor is Invesco’s QQQ, launched in March 1999. However, I couldn’t find any historical 13F data until the first quarter of 2001. In other words, the numbers for QQQ represent its institutional adoption nine quarters after its launch. Even then, the number of Bitcoin ETF buyers is three times that of QQQ.
Some might argue that comparing Bitcoin ETFs as a whole to a single ETF is unfair. But even if you consider a single Bitcoin ETF, it still ranks at the top. For instance, Bitwise’s Bitcoin ETF (ranked fourth by AUM among Bitcoin ETFs at the end of Q2) has more institutional holders (139) than the giant SPDR’s GLD (118).
ETFs are unique investment products that both institutional and retail investors can hold. We shouldn’t let the historic retail adoption of Bitcoin ETFs overshadow another fact:
Bitcoin ETFs are also more popular among institutional investors than any other ETF in history.
Insight 3: Most Institutions Are Still Testing the Waters
Another important point is that the median investor only allocated 0.47% of their portfolio to Bitcoin ETFs in Q2.
This is an encouraging figure. After managing cryptocurrency risk for professional investors for six years, we’ve observed a trend where institutions tend to build their positions over time. Many start with 1% or less of their portfolio, but this figure often rises to 2.5% or even 5% over time.
I expect institutional investors’ Bitcoin ETF allocations to exceed 1% within a year and continue to grow.
Conclusion: Institutional Bitcoin ETF Holdings Will Grow Annually
Overall, I find the Q2 2024 13F filings encouraging. Despite Bitcoin’s price decline, institutions continued to buy Bitcoin ETFs in the second quarter. Hundreds of new institutional investors made their first purchase. Moreover, the adoption of Bitcoin ETFs by institutions is happening faster than with any other ETF in history.
Having witnessed the launch of various ETFs over the past two decades as the former CEO of ETF.com, I’ve noticed that most ETF holdings build over time. The first year may involve testing the waters, but momentum often grows in the second, third, fourth, and fifth years.
The same will happen with Bitcoin ETFs. After all, major institutions are just beginning to open access to Bitcoin ETFs (Morgan Stanley approved them earlier this month). I expect Bitcoin ETF inflows in 2025 to surpass those in 2024, with 2026 surpassing 2025. Institutions are steadily entering the space, and they’re doing so in increasing numbers.