Taming Bitcoin: How Major Funds Profit from Cryptocurrency

A top manager at BlackRock has stated that clients of their ETF are investing in Bitcoin for the long term. Why ETF issuers are promoting cryptocurrencies and how this might pose risks to the long-term development of the market.

Since the advent of the first cryptocurrency over 15 years ago, few initially saw Bitcoin as a global asset with a market capitalization that would one day exceed $1 trillion. Even in 2024, when a Bitcoin ETF was approved in the US, there are still many critics. For instance, in April, JP Morgan's CEO Jamie Dimon once again called Bitcoin a fraud in an interview with Bloomberg.

However, this hasn't stopped many investors, funds, companies, celebrities, and even politicians from promoting the leading cryptocurrency worldwide, advancing the concept of "Hodl."

Hodl is a cryptocurrency term analogous to the "Buy and Hold" strategy in traditional financial markets. It denotes a long-term passive investment strategy where investors maintain a relatively stable portfolio over time, regardless of short-term price fluctuations.

The term "Hodl" originated in 2013 on the BitcoinTalk forum when a user misspelled "Hold." In the post, Bitcoin holder GameKyuubi explained that he did not intend to sell his Bitcoin in a bear market.

The most famous proponent of the Hodl strategy is the American company MicroStrategy. Under the leadership of its former CEO and now Chairman of the Board Michael Saylor, it was one of the first organizations to publicly announce the purchase of Bitcoin for its corporate balance sheet in 2020. Since then, it has accumulated over 226,300 BTC, which, as of July 26, is worth more than $15 billion.

At the end of July, American public mining company Marathon Digital Holdings announced that it had fully adopted the Hodl strategy for the main cryptocurrency. In a press release, Marathon stated it had stopped selling all mined Bitcoins and even bought $100 million worth from the open market. The company believes that Bitcoin is the world's best reserve and urged governments and corporations to hold coins as a reserve asset.

This strategy's popularity is also noted by BlackRock. Speaking at the Bitcoin 2024 conference, the company's head of digital assets Robert Mitchnick said that Bitcoin ETF shareholders tend to favor the "buy and hold" strategy.

BlackRock is the world's largest asset management company. As of the end of July 2024, its Bitcoin-based ETF manages almost $22 billion in cryptocurrency. In a July interview with CNBC, BlackRock CEO Larry Fink called Bitcoin "digital gold." He admitted to being skeptical of Bitcoin for five years but has since studied it and become a supporter.

However, there is a difference between what private investors promote—buying and storing physical Bitcoin themselves—and what funds offer: buying and holding cryptocurrency through instruments like ETFs. Funds are known to charge management fees. For example, according to Sosovalue, the total capital of US spot Bitcoin funds has reached $60 billion. With an average fund fee of approximately 0.2%, issuers will earn about $120 million in revenue. Thus, the motives of private investors and ETF issuers may differ.

ETF Success Risks

Cryptocurrency funds may be only a small part of the global ETF market trend, which is estimated at $12 trillion.

The excitement around new instruments like cryptocurrencies in the stock market may be driven by declining interest in traditional assets such as bonds. For issuers, this is a new opportunity.

"Boomers have lost faith in bonds as portfolio hedging, burned by high rates and inflation. This reality may have pushed the current generation to seek portfolio protection solutions outside of bonds, rather than hoping for another cyclical bull market," Bloomberg quotes its ETF market analyst James Seyffart.

The number of open ETFs in the US exceeded 3,200 according to Statista data for 2023, which is about 1,000 more than in 2020 and twice as many as in 2015. The amount of assets under management has grown by 50% from $8 billion at the beginning of the year. Thus, the volume of assets under management in US exchange-traded Bitcoin funds amounted to only 0.5%.

Experts also note the risks of expanding exchange products to cryptocurrencies. Spot ETFs take people further away from self-custody and potentially create systemic risk, according to Trezor analyst Josef Tetek. He believes that the result of launching ETFs could diminish the value of the real asset, providing more freedom of action to traditional centralized financial giants, Cointelegraph quotes.

This opinion is shared by former BitMEX CEO Arthur Hayes. He suggested that if Bitcoin ETFs become too successful, they could completely kill the leading cryptocurrency, as it would become almost entirely controlled by the government, which regulates the activities of each ETF