Source: Coin Stories

Compiled by: Felix, PANews

James Seyffart, senior ETF analyst at Bloomberg, returns to Coin Stories to provide an in-depth analysis of the latest developments in the ETF space: from the unexpected “diamond hand” strategy employed by Bitcoin ETF holders during a 50% drop to Morgan Stanley’s landmark decision to launch its own Bitcoin ETF.

Host: It's been a while since we've discussed ETFs. How about starting with Bitcoin? What's the current situation with Bitcoin ETFs?

James: Simply talking about fund inflows and outflows might not be as exciting, but I think it's helpful to do a periodic recap for you and your audience now and then. About a year ago, around April 2025 (or earlier), we experienced a crash. From that low point until October 10th, approximately $25 to $30 billion flowed into Bitcoin ETFs, which performed exceptionally well. However, starting October 10th, about $9 billion flowed out. At the time, the media was talking about it like it was the end of the world, saying there was a massive capital flight. But if you take a step back, you'll see that over $25 billion had flowed in over the previous months, so a $9 billion outflow wasn't a big deal. Funds come and go; that's how ETFs work. What you want to see is a long-term upward trend. So from February 23rd to late March, there was actually a fairly significant inflow. Much of the outflow has reversed; about $2 to $2.5 billion has flowed back in. While not all outflows have reversed, the situation has stabilized, and prices have become more stable, with us hitting new lows almost every week. So Bitcoin ETFs have performed exceptionally well; they've handled this situation well, and there's no disconnect in the market. Buying activity is still occurring. We learned from 13F filings that some investment advisors and hedge funds were selling in the fourth quarter. I think this has a lot to do with basis trading, so some of the outflows I mentioned earlier may have almost nothing to do with price action. It's more about basis trading: when you short futures and buy spot, you get a risk-free profit, which many speakers have discussed. But I want to emphasize that if an asset has fallen by more than 50%, and the outflows ($9 billion) are less than 15% of the total inflows in the first two years after its launch, that's truly remarkable. So what ended up was: OGs sold Bitcoin, while Bitcoin ETF holders were the real "diamond hands," holding on very firmly.

Host: That's exactly what I wanted to focus on. Because I saw that you and Eric Balchunas both tweeted that no one expected investors to withstand drawdowns as high as 50%, but in the world of ETFs, they did, holding on instead of selling.

James: Yes. We said when the ETF was launched that many people who were skeptical of ETFs thought "holders will be weak and will sell at the slightest sign of trouble." But the truth is, if you're an ETF holder, you most likely didn't buy it because you were sold to it. You actively sought out information about ETFs and their underlying assets before making the decision. Through this research, you learned that the asset has historically experienced 70% to 80% drawdowns multiple times. And investors like those at Vanguard regularly deposit money into their investment accounts every two weeks, many simply to achieve a set asset allocation goal. Before the ETF was launched, we discussed what would happen with allocations of 1%, 3%, or 5%. This isn't like Bitcoin enthusiasts who allocate 80% of their net assets. For these ETF holders, it's only a small portion of their portfolio. So, with only a 3% position, even if there's a 50% drop, while it might hurt a bit, it's not a big deal; they won't sell and run. I think what's happening now is that people are actually adding to their positions when rebalancing their portfolios. If your target allocation is 5%, and it's halved to 2.5%, you'll likely buy back in to get back to 5% when you rebalance your portfolio quarterly or annually. The same applies during a rally. This is one reason we'll see price volatility leveling off as the importance of Bitcoin ETFs grows. Theoretically, you shouldn't see extreme topping frenzies or complete crashes anymore. That's exactly what's happening; we haven't seen a 70% pullback below $40,000, nor have we seen extreme topping frenzies. Basically, everyone's saying that, but I think you've seen it in the ETF, and there are good reasons for it to happen.

Host: Can you share who is buying and holding these ETFs? We've seen it in university endowment funds and pension funds, and I've heard that IBIT is Harvard University's largest holding?

James: Yes, these 13F filings only show equity holdings. Fortunately, because ETFs fall under this reporting standard, we can see who holds ETFs, but we can only see long positions. Hedge funds are a large user group of ETFs, but they often short them based on net asset value. So I should remind you that we don't know the specifics of Harvard's endowment fund, but they do hold a significant proportion. Yale University also holds these assets, including Ethereum. The biggest buyers remain investment advisors, wealth advisors, and broker-dealers—typically middle- to high-income individuals who have advisors managing their finances. Nevertheless, 13F filings still reveal a limited picture. By the end of September 2025, we knew only about 27% of the holders. Even after seeing some outflows from hedge funds and advisors in the fourth quarter, that number has now dropped to below 25%. This means we only know about a quarter of the holders, implying that the vast majority are held by retail investors through brokerage platforms like Robinhood or Schwab, or by international institutions that don't require 13F filings. As for institutions, most of them are investment advisors, and they are institutions at the 13F level.

Host: There are 11 approved ETFs, right? How are they performing now? And Morgan Stanley is about to enter the market?

James: Yes, there are probably 12 now. You can also include futures products, buffered products with option caps, and covered call options. Bitcoin-related products have formed a complete sub-ecosystem, and they're all performing well. Many people ask how there can be so many products, but it depends on the amount of capital inflow; even the smallest has hundreds of millions of dollars and is profitable. As for rankings, BlackRock's IBIT is far ahead in terms of trading volume, assets, and capital inflows. Following behind are Vaneck's HODL, Bitwise, Fidelity's FBTC, and so on—all of these funds are performing well. For ETFs, it mainly depends on whether they're attracting capital, whether their asset size is sufficient, and whether the product is profitable; all of these are happening right now.

Then you mentioned Morgan Stanley's upcoming Bitcoin ETF, which is significant. Recall the 2017 slogan, "Go long on Bitcoin, go short on banks," and now one of the largest banks in the US is about to launch a Bitcoin ETF. It's extremely rare for Morgan Stanley to issue an ETF under its own brand; they have "own assets," with clients on their platform holding over six trillion dollars in assets. When clients inquire about Bitcoin and want to include it in their portfolios, they naturally push forward since they can do it themselves without handing over their money to another issuer. While some Bitcoin proponents feel that banks are assimilating something they once wanted to disrupt, this is definitely a big deal.

Host: Do you think this is the beginning of all the big banks entering this space and issuing their own ETFs?

James: To be honest, I was surprised when Morgan Stanley applied for ETFs for Bitcoin, Ethereum, and Solana simultaneously. They're late to the game, and so far, the products don't seem differentiated; they're just another spot product. There are already other products in the market that aim to offer unique ways to play Bitcoin, such as the covered call options mentioned earlier. There are also those that combine it with carbon credits, catering to institutions worried about the problems associated with Bitcoin mining. We don't need to delve into that topic, but you can understand why institutions would want that kind of product.

Based on the current application documents, it seems to be just another ordinary spot Bitcoin product. There's relatively little differentiation; at least I don't see any, and I'm not afraid of being corrected. So it's interesting that they're entering this space at this stage, but as I said, they have the advantage of having their own clientele. I don't think other banks will necessarily follow suit. Morgan Stanley is a particularly large company. But I'm adding a caveat: I didn't expect Morgan Stanley to launch this in the first place.

Host: Has there been any change regarding in-kind redemption?

James: Good question, this is becoming increasingly important. In the early years, issuers weren't allowed to make physical redemptions (exchanging Bitcoin for ETF units, or vice versa), but now it is. Previously, you had to go through a "cash creation" process. There were a lot of unnecessary cash flow steps involved because the specific banks and market makers that made markets for these ETFs weren't allowed to access the crypto market. So they had to handle cash flow and had to have subsidiaries that could process that cash. The ETF itself had to go out and buy Bitcoin, usually through a prime brokerage desk like CoinDesk or some other service provider.

Host: And now we can use the model we just discussed.

James: Yes, product efficiency is becoming incredibly high. If you buy IBIT or FBTC in the US, the price difference is only a few cents, and there are almost no transaction fees, which is significant for ETF efficiency. Now they are integrating into the physical market. Currently, only authorized participants, i.e., large banks, can do this, but for example, VanEck has a gold product where retail investors can have gold delivered directly to their doorstep once they reach a certain holding amount. So in the next few years, I have no doubt that if you have $10,000 to $20,000 in a Bitcoin ETF, and are whitelisted, they will send Bitcoin directly to your wallet address. Unlike gold, which is heavy, Bitcoin can be sent instantly. Due to competition among issuers, this could become a cheaper and more efficient way to gain Bitcoin exposure than through centralized exchanges in the future.

Host: I have a question. Most of these ETF issuers use the same custodian. Isn't that a risk?

James: Yes. Coinbase holds the majority of Michael Saylor's Bitcoin and about two-thirds or three-quarters of the Bitcoin ETFs. While there are many applications now trying to diversify custodians—for example, BlackRock has chosen three staking providers, and BitGo and Gemini are custodians for various companies—ultimately, it's still highly concentrated on Coinbase. So a large portion of the ETF holdings data you see is in Coinbase's vault. But that's the "Lindy effect"—the longer you're in the market, the more trusted you become, and issuers still choose them in this process. This is something I'm watching and slightly concerned about.

Host: Many Bitcoin supporters are disappointed that gold has outperformed Bitcoin as an inflation hedge and against currency devaluation. What is the current liquidity situation of gold ETFs?

James: We previously discussed the outflow of funds from Bitcoin ETFs between October and February, while gold saw the exact opposite, with funds flooding into gold ETFs. Gold prices even broke through $5,000. Ironically, the direction has now reversed, with significant funds flowing out of gold, but similar to Bitcoin, the inflows were far greater than the outflows in recent weeks. Over the past eight months, Bitcoin and gold fund flows have been almost negatively correlated. This is because Bitcoin's performance closely mirrored that of software stocks during this period. When Bitcoin initially fell below $60,000, no one bought on the dip; everyone waited and saw until it bottomed out and consolidated before funds re-entered. The same applies to gold; people are now withdrawing. This is because people tend to sell what has risen. For example, if you want to hold cash due to the Iran situation, would you sell an asset that has fallen 50%, or an asset that has gained 50%? Obviously, the latter. This is the phenomenon of market mean reversion.

Host: What is the largest gold ETF?

James: GLD. It's State Street's SPDR Gold Trust, a partnership with the World Gold Council, but they also have GLDM, a mini version with much lower management fees. Then there's BlackRock's IAU, and the mini, cheaper version IUM. But they all do the same thing, usually just storing gold in a vault in London, nothing more.

Host: How do they compare to Bitcoin ETFs in terms of size and liquidity?

James: Liquidity is about the same. But gold ETFs are much larger. The first gold ETF was launched in 2004, allowing people to make long-term gold allocations for the first time and bringing a bull market that lasted until 2011. In December 2024, the total size of Bitcoin ETFs rapidly approached that of gold ETFs, falling just a few billion dollars short. But with the subsequent sell-off of Bitcoin, and gold experiencing a "double boost" of soaring prices and inflows in 2025, gold ETFs are now almost twice the size of Bitcoin ETFs.

Host: Do you think Bitcoin can catch up?

James: Our view is that Bitcoin ETFs will eventually surpass gold ETFs in size, but it's hard to say right now. People buy Bitcoin ETFs for many reasons: some see it as "digital gold" or a risk diversification tool, while others agree with Michael Saylor's narrative of digital asset credibility. In contrast, gold's use cases are relatively limited (a diversification tool and a hedge against currency devaluation). Meanwhile, the market is currently trading Bitcoin as a "risk-growth asset." Therefore, Bitcoin can be used in portfolios as a "spice sauce" for those seeking liquidity growth, so I think they will eventually catch up with gold; it's just that the current trend is the opposite.

Host: Everyone knows that Bitcoin represents a small portion of an investment portfolio. But I've noticed that almost no one holds gold. Investment advisors currently have very low gold allocations. Do you think this situation will change? Will it gradually increase to 3-5%?

James: Yes. The problem with gold is that many advisors think it's just a "pet rock," with no reason to hold it. But I think that's going to change, especially as we're moving towards a multipolar world. There are many studies showing that if you swap bonds in a 60/40 portfolio for gold, the long-term returns are almost identical. Some complain that gold didn't rise when inflation was high because, like Bitcoin, gold has almost zero correlation with inflation in the short term, making it not a short-term safe-haven asset. It's a long-term hedge against currency devaluation, and because of its low correlation, it's an excellent risk diversification asset. Bitcoin's correlation with other traditional assets is only around 0.2 to 0.3, making it very suitable for risk diversification. Because the market has been so volatile, the pullback in precious metals even looks somewhat like that of digital assets, especially silver.

Host: Yes, could you take a step back and share your views on the overall market? The stock market has been performing strongly, but there has been volatility in private lending that is impacting valuations. What do you foresee for the next 6 to 12 months?

James: There are always people in the market warning of various geopolitical and AI-induced crises, which easily makes them seem clever. But I'm a long-term bull, and my underlying logic is that everyone is working hard every day to improve the world, so my funds remain allocated to stocks and risky assets. As for private lending, publicly traded business development companies (BDCs) are currently trading at discounts of over 20%, which shows how worried people are. There's no smoke without fire; there's already real fraud in private lending. Moreover, private lending is heavily skewed towards the software industry, and as AI drives the development cost of new software closer to zero, there are concerns that these software companies will be unable to repay their loans. The market is pricing in serious problems with private lending; these lock-up products have extremely poor liquidity, and once you want to exit, you simply can't get your money back. Hopefully, investment advisors fully explained this illiquidity risk when selling these products.

Host: I'd also like to ask about those derivative Bitcoin-related products, such as Strategy's digital lending. Do you think we'll see ETFs that include these perpetual preferred stock instruments in the future?

James: Yes, there are already preferred stock ETFs on the market, as well as a few ETFs that invest in the equity and debt of digital asset treasury companies. Although the inflow of funds is not very large yet, if this sector continues to grow, they will likely eventually be packaged into ETFs that focus on crypto and Bitcoin balance sheet companies.

Host: We are in a chaotic time when everyone is very nervous, with geopolitical crises, fears of being replaced by AI, and so on. What are you most concerned about, and what do you want everyone to know?

James: I'm closely watching where people are putting their money. Ironically, we're seeing the market become extremely diversified. Last year everyone was talking about the MAG 7 tech giants, but they've actually underperformed since Q3 2025. Small-cap stocks, real assets, and international equities have outperformed. So I'd say diversification is extremely important.

Furthermore, over the past six months, almost nothing has truly served as a hedge or shown a negative correlation: Bitcoin has fallen, gold has fallen, and bonds haven't provided any diversification. The only thing that can offer diversification is cash. This is the "death of hedging tools"—aside from trading extremely complex options derivatives, ordinary people can probably only cope by maintaining a diversified investment portfolio and holding some cash.

Related reading: a16z Wealth Manager: Embrace a 40% market pullback; don't invest 80% of your "first pot of gold" in a friend's business.