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Wall Street’s big bet: Hedge funds and banks dive into Bitcoin ETFs!

Hedge funds and banks dive into Bitcoin ETFs

When it comes to Bitcoin ETFs, it’s not just the retail trading crowd that’s taking the plunge. Hedge funds, pension funds, and banks have also invested capital into these exchange-traded funds following their highly anticipated debut, which was more than a decade in the making. The entry of these large institutional players marks a significant milestone in the evolution of Bitcoin ETFs, indicating a level of acceptance and validation from some of the most sophisticated investors in the financial world. The participation of these entities not only adds credibility to the Bitcoin ETFs but also highlights the growing interest and potential mainstream adoption of digital assets.

Among the most well-known buyers that have emerged are hedge funds such as Millennium Management, which held around $2 billion worth of shares in at least four Bitcoin ETFs. Additionally, Steven Cohen’s Point72 Asset Management, Elliott Investment Management, and Citadel Advisors have also invested in these funds. These high-profile investments from leading hedge funds demonstrate a strategic move towards diversifying their portfolios with digital assets. Millennium Management’s substantial holdings, in particular, underscore the firm’s confidence in the potential growth and profitability of Bitcoin ETFs, while the involvement of other top hedge funds reflects a broader trend of institutional interest in cryptocurrency investments.

Other investors include institutions like the State of Wisconsin Investment Board and the Bank of Montreal, as well as firms from various global regions, including Hong Kong, the Cayman Islands, Puerto Rico, and Switzerland. Following the Wednesday deadline to file first-quarter 13F reports with the US Securities and Exchange Commission, approximately 1,000 filers were reported to hold shares in these ETFs, according to a Bloomberg analysis of the filings. This widespread geographic and institutional participation indicates a global acknowledgment of the potential that Bitcoin ETFs hold. The diverse range of investors highlights how Bitcoin ETFs are appealing across different regulatory environments and investment strategies, further solidifying their place in the global financial ecosystem.

These reports provide only a snapshot in time at the end of the first quarter, making it difficult to discern the exact reasons money managers were holding these ETFs. It’s likely that not all of them are bullish on Bitcoin. Some may have opened positions to profit from the cryptocurrency’s volatility or to offset short positions in derivatives. Others might have bought the ETFs as part of a basis trade, a strategy that exploits price differences between spot and futures markets without the hassle of dealing with Bitcoin directly. Some trading strategies are model-driven, meaning the investments don’t necessarily reflect any opinions on Bitcoin’s fundamental value. This variety in investment strategies illustrates the multifaceted nature of trading and holding Bitcoin ETFs, where the motivations can range from speculative to strategic risk management.

Millennium, Point72, and the State of Wisconsin Investment Board declined to comment on their positions, while others did not respond immediately to requests for comment. The reluctance of these institutions to disclose their specific strategies or opinions on Bitcoin ETFs can be attributed to competitive reasons and the strategic nature of their investments. Their silence also reflects the cautious approach that many institutional investors take when navigating the relatively new and volatile landscape of digital assets. This non-disclosure highlights the opaque nature of high-stakes financial maneuvers and the careful management of public perception and market impact.

Nevertheless, the initial filings since the introduction of Bitcoin ETFs indicate that Wall Street is beginning to explore the world’s largest digital asset, regardless of the varied motivations behind these investments. The entrance of these significant financial players into the Bitcoin ETF market underscores a pivotal shift in the investment landscape. It signifies that traditional financial institutions are starting to recognize and potentially embrace the value proposition of Bitcoin, not just as a speculative asset but as a legitimate component of a diversified investment portfolio. This trend could pave the way for further institutional adoption and integration of digital assets into mainstream finance.

“The 13F releases show that the growth of Bitcoin ETFs can’t just be attributed to retail traders buying in brokerage accounts,” said Stephane Ouellette, chief executive officer of FRNT Financial. “Clearly, portfolio managers, institutional investors, and banks have at least begun to test the waters of ownership.” Ouellette’s observation highlights the broadening base of Bitcoin ETF investors, moving beyond the initial retail enthusiasm to include more sophisticated and traditionally conservativeinstitutional investors. This diversification of investor types is crucial for the long-term stability and growth of Bitcoin ETFs, as it brings different perspectives, strategies, and risk tolerances into the market.

However, for now, retail investors still own most of the shares in Bitcoin ETFs, according to Matt Hougan, chief investment officer at Bitwise Asset Management. Retail investors have played a pivotal role in the early success of Bitcoin ETFs, driven by strong interest and belief in the potential of cryptocurrencies. Their substantial ownership stake demonstrates the grassroots support and adoption of Bitcoin as an investment vehicle. Hougan’s observation indicates that while institutional interest is growing, the retail segment remains a dominant force in the Bitcoin ETF market, reflecting the democratization of investment opportunities through digital assets.

“We often see professionals make a small personal allocation before allocating on behalf of clients,” he wrote in a note. “They want to test things out before exposing their investors.” Hougan’s note explains a cautious approach commonly adopted by investment professionals when dealing with new and relatively untested investment products like Bitcoin ETFs. By initially investing their own money, professionals can evaluate the performance, risks, and operational aspects of these funds before making recommendations or allocations on behalf of their clients. This methodical approach helps to ensure that they thoroughly understand the investment vehicle and can make informed decisions that align with their clients’ risk profiles and investment goals.

BlackRock’s iShares Bitcoin Trust (ticker IBIT) was held by around 420 firms that filed 13Fs, making it the market leader after surpassing all its peers in terms of inflows. Over 230 filers held the Fidelity Wise Origin Bitcoin Fund (FBTC), while the Grayscale Bitcoin Trust (GBTC) had over 620 13F investors, totaling a market value of around $8.4 billion, according to data compiled by Bloomberg. The significant holdings in these leading Bitcoin ETFs reflect their popularity and acceptance among institutional investors. BlackRock’s dominance in particular underscores its strong reputation and trust in managing large-scale investment funds, attracting a substantial number of investors. The diverse holdings across different funds also indicate that investors are exploring various options to gain exposure to Bitcoin through established and reputable financial products.

Other ETFs launched around the same time in January have averaged just three to five holders, according to data compiled by Bloomberg Intelligence’s Eric Balchunas. According to Bitwise’s Hougan, when the first gold ETF was launched in 2004, initial 13F filings showed just around 95 professional firms invested in the product. This comparison highlights the rapid growth and adoption of Bitcoin ETFs in a relatively short period. The significant number of initial investors in Bitcoin ETFs, compared to the early days of gold ETFs, suggests a faster acceptance and willingness to experiment with new financial products in the current investment climate. It reflects a growing comfort with digital assets and a recognition of their potential value in diversified investment strategies.

“This is likely to continue to expand, as investment allocations of new assets often take place in stages, and many funds/platforms are still working on due diligence and onboarding,” said Noelle Acheson, author of the Crypto Is Macro Now newsletter. “Plus, investment interest will pick up again when the market does – it has been directionless for a few weeks.” Acheson’s insights suggest that the adoption of Bitcoin ETFs is a gradual process that will unfold over time as more funds complete their due diligence and onboard these products. Her remarks also indicate that market conditions play a significant role in driving investment interest, with periods of market stagnation temporarily dampening enthusiasm. However, as market dynamics shift, renewed interest and increased investment allocations are likely to follow, further fueling the growth of Bitcoin ETFs.

Over the past few months, market participants have watched in awe as money flows into these ETFs, breaking one record after another. In February, BlackRock’s IBIT saw a record $520 million inflow in one day — one of the largest daily intakes ever for any US ETF across all asset classes — followed by a $612 million inflow the very next day. These unprecedented inflows highlight the strong demand and confidence that investors have in Bitcoin ETFs. The substantial capital moving into these funds on consecutive days underscores the eagerness of investors to gain exposure to Bitcoin through regulated and structured investment products. This trend also reflects the broader acceptance of Bitcoin as a viable and potentially profitable asset class within the financial community.

The demand for the ETFs is undeniably clear, but the reasons behind these purchases are not as straightforward. Investors’ motivations for purchasing Bitcoin ETFs can vary widely, from seeking speculative gains and diversification to hedging against traditional market risks and inflation. The complexity and diversity of these motivations make it challenging to pinpoint a single reason driving the surge in demand. However, the overall interest in Bitcoin ETFs signifies a growing acknowledgment of the potential benefits and opportunities that digital assets can offer within a well-rounded investment strategy.

For Ben Brocker, investment strategist at Legacy Wealth, which manages around $450 million in assets, Bitcoin ETFs are simply a diversifier. His Minneapolis-based firm first invested in Bitcoin in 2020 through GBTC before it converted into an ETF this year and eventually landed with Fidelity’s Bitcoin fund. The firm allocates a modest 2%, given the cryptocurrency’s price volatility. Brocker said Legacy Wealth decided to “ride it out” and now feels “much better on the other side of it.” Brocker’s experience illustrates the cautious yet optimistic approach some investment firms take when incorporating Bitcoin into their portfolios. By maintaining a small allocation, they mitigate risk while still participating in the potential upside of the digital asset. His comments about feeling better on the other side of it suggest that the firm’s initial skepticism has given way to a more favorable view based on their investment experience.

“Like everybody else, we were huge skeptics for years on Bitcoin, and then eventually we discovered a few things about it,” he said. “We believe it’s a better monetary asset than gold for this digital age that we’re in. It’s mistakenly compared against other cash-flow investment assets like bonds, real estate, or stocks. But I really think it needs to be viewed as a monetary asset.” Brocker’s shift from skepticism to acceptance highlights a common journey among investors who initially doubted Bitcoin’s value but came to appreciate its unique characteristics and potential as a digital monetary asset. His comparison of Bitcoin to gold emphasizes its role as a store of value in the modern digital economy, distinguishing it from traditional investment assets that generate cash flow.

For others like Chad Koehn, chief executive officer at United Capital Management, who manages more than $500 million of discretionary assets, the investment was about getting in with the right vehicle at the right time. Koehn firmly believes that Bitcoin offers something unique that other assets can’t. Koehn became interested in Bitcoin shortly after its creation and made his first official investment in 2013. Koehn’s early interest and investment in Bitcoin reflect a forward-thinking approach and a willingness to explore emerging technologies and asset classes. His background as a competitive rodeo athlete adds an interesting dimension to his investment philosophy, suggesting a mindset that embraces risk and innovation.

“Why are we bullish on Bitcoin? The answer lies in the innovative ledger technology of Web3,” he said. “As for the competition mocking me, it doesn’t bother me at all. I think they’re naive to how rapidly digital ledger technology is revolutionizing business transactions and how important digital asset classes are as a hedge on inflation and the debasement of currency.” Koehn’s bullish stance on Bitcoin is rooted in his belief in the transformative potential of blockchain and digital ledger technologies. His confidence in Bitcoin’s role as a hedge against inflation and currency debasement reflects a broader trend among investors who view digital assets as a safeguard in an uncertain economic environment. His disregard for critics underscores his conviction in the long-term value and impact of Bitcoin and related technologies.

(Source: Bloomberg)



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