Bitwise Chief Investment Officer: Who is buying Bitcoin ETFs?

Original author: Matt Hougan, Chief Investment Officer, Bitwise

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Spot Bitcoin ETFs have been a huge success. Since their launch on January 11, they have attracted $11.7 billion in capital, making them the most popular ETFs ever.

Now everyone wants to know: Who is buying? Specifically, people want to know whether professional investors or retail investors are driving the flow of funds.

This is an important question. The great promise of Bitcoin ETFs is that they could open the door for professional investors to buy Bitcoin in large quantities, thereby significantly increasing the pool of money invested in Bitcoin.

If it’s professional investors buying, that’s great. But if it’s all retail investors, that’s not so encouraging. Why? Because the scale behind it is simply different.

In the first few months after the ETF was launched, there was no answer to this question. Investors bought ETFs through brokerage accounts, which meant that fund companies like Bitwise would not know who was buying their funds. But once a quarter, the U.S. Securities and Exchange Commission requires investors with more than $100 million in assets under management to report their holdings of publicly traded securities through so-called 13 F filings.

Technically, these filings are due 45 days after the end of the quarter, which means investors have until May 15 to file. But thousands have already filed, so we now have a first look at the owners of these ETFs.

These are very, very interesting data, but here are the three most important ones.

Point 1: Many professional companies have Bitcoin ETFs

To write this memo, I analyzed all 13F filings for the 11 publicly traded spot Bitcoin ETFs as of May 9. The big finding: Many professional investors own Bitcoin ETFs.

These include some well-known asset management companies, such as:

• Hightower Advisors: According to Barron’s, the firm is the second-largest RIA firm in the U.S. with $122 billion in assets under management. They have a $68 million Bitcoin ETF.

• Bracebridge Capital: A Boston-based hedge fund that manages money for Yale University and Princeton University, among others. They hold $434 million worth of Bitcoin ETFs.

• Cambridge Investment Research: A 40+ year old firm with over $170 billion in assets under management. They have a $40 million Bitcoin ETF.

• Sequoia Financial Advisors: Based in Towson, Maryland, with a market cap of $17 billion. They have a $12 million Bitcoin ETF.

• Integrated Advisors: A Dallas-based firm with over 12,000 clients and $4 billion in assets under management. They have an $11 million Bitcoin ETF.

• Brown Advisory: A $96 billion firm based in San Francisco. They have a $4 million Bitcoin ETF.

As of last Thursday, 563 professional investment firms reported holding $3.5 billion worth of Bitcoin ETFs. By the time the May 15th filing deadline arrives, I estimate we could end up with over 700 professional firms with a total AUM approaching $5 billion.

This is definitely a big deal. For any financial advisor, family office or institution wondering if they are the only one considering investing in Bitcoin, the answer is obvious: you are not alone.

Point 2: Historical size of professional investor holdings

For a new ETF, this size of holding is unusual. Most ETFs attract very few 13F filers in their first few months on the market. Bloomberg ETF analyst Eric Balchunas said the number of large investors in the Bitcoin ETF is surprising.

The closest comparison I can find in historical records is the launch of the Gold ETF in late 2004. At the time, the launch of the Gold ETF was considered the most successful ETF ever, raising over $1 billion in just five days. But at the time of the initial 13 F filing, the Gold ETF had only 95 professional firms investing in it.

In terms of ownership breadth, Bitcoin ETFs have been a historic success.

Point 3: Retail investors hold the majority of outstanding shares of Bitcoin ETFs

While I think $3-5 billion and 563-700 companies are a huge success, it’s important to remember that Bitcoin ETFs have $50 billion in assets under management. So as a percentage of total investment, professional investors only own 7-10% of all assets.

I suspect the media will seize on this number to suggest that these ETFs are “retail-driven” funds. To some extent, they have a point: retail investors are indeed investing a lot of money in Bitcoin ETFs, and that’s a good thing. It means they have access to these investments on the same terms as the world’s largest institutions.

But I think this argument misses a key pattern we’re seeing among institutions in terms of cryptocurrency allocation.

Let me explain.

Why These 13 F Files Make Me Unusually Optimistic

Bitwise has been helping professional investors gain access to cryptocurrency for over seven years. Today, we serve thousands of firms, including RIAs, brokers, family offices, and institutions.

One thing I’ve learned from seven years of practice is that most investors follow a familiar pattern:

• Step 1: Due Diligence. Most professional investors take 6-12 months to evaluate cryptocurrencies. It is extremely rare for a client to allocate funds into the space immediately after an initial meeting.

• Step 2: Personal Allocation. We often see professionals make a small personal allocation before making an allocation on behalf of a client. They want to test before bringing an investor to market.

• Step 3: Independent configuration for clients. Next, these professionals usually configure on behalf of a small number of clients, usually those who proactively ask them about cryptocurrency.

• Step 4: Platform-wide allocation. Beginning approximately six months after the initial allocation, many firms begin to allocate across their entire client base, ranging from 1%-5% of the portfolio.

Not all advisors fit this mold, but it’s what we typically see.

This tells us that the Bitcoin ETF allocations shown in recent 13 F filings are just preliminary attempts. For example, Hightower Advisors may allocate $68 million to a Bitcoin ETF today, which is great, but that’s only 0.05% of their assets. If they follow the pattern above, this allocation will increase over time. Specifically, allocating 1% of their portfolio to Bitcoin would equate to $1.2 billion, and that’s just from one firm.

Combine that with the growing number of professional investors participating in this space and you can understand why I’m so excited.

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