Source: Coin Stories
Organized by: Felix, PANews
Bloomberg Senior ETF Analyst James Seyffart returns to Coin Stories to delve into the latest developments in the ETF space: from Bitcoin ETF holders demonstrating surprising "diamond hands" through a 50% decline, to Morgan Stanley’s landmark decision to launch its own Bitcoin ETF.
Host: It’s been a while since we last discussed ETFs. Let’s start with Bitcoin—what’s the current situation with Bitcoin ETFs?
James: Talking purely about inflows and outflows might not sound exciting, but I think it’s beneficial to occasionally take a step back and give you and our audience a progress update. About a year ago, we experienced a sharp decline around April 2025 (or earlier), and from that low point until October 10, approximately $25 to $30 billion flowed into Bitcoin ETFs—performing exceptionally well. But starting on October 10, about $9 billion flowed out. At the time, the media was sounding alarms as if the sky were falling, claiming massive capital flight. Yet if you take a broader view, you’ll see that over the preceding months, more than $25 billion had flowed in—so a $9 billion outflow isn’t a big deal. Capital flows in and out; that’s how ETFs are designed to work. What you want to see is a long-term upward trend. From February 23 through late March, there was actually significant inflow again. Much of the prior outflow has been reversed, with roughly $2 to $2.5 billion flowing back in. Not all of the outflow has been recovered, but things have stabilized, prices have become more steady, and we’ve nearly every week been making higher lows. So Bitcoin ETFs have performed exceptionally well—they’ve handled this situation effectively, with no signs of market dislocation. Buying activity is still ongoing. From 13F filings, we know that some investment advisors and hedge funds sold during the fourth quarter. I believe this is largely tied to basis trading, so some of the outflows I mentioned earlier may have had almost nothing to do with price movements. It was more about basis trading: when you short futures while buying spot, you capture a risk-free yield, something many of our previous guests have discussed. But I want to emphasize this: if an asset has dropped more than 50%, and the outflow ($9 billion) is less than 15% of the total inflow during its first two years of existence, that’s truly impressive. Ultimately, what happened is that OGs sold their Bitcoin, while Bitcoin ETF holders proved to be the true “diamond hands,” holding firm with unwavering conviction.
Host: That’s exactly what I want to dive into, because I saw you and Eric Balchunas both tweet that investors weren’t expected to withstand a drawdown as high as 50%, but in the world of ETFs, they did—they held on instead of selling.
James: Yes. When the ETF launched, we said that many skeptics of ETFs would think, “The holders will be weak and sell at the first sign of trouble.” But the reality is, if you’re an ETF holder, you likely didn’t buy it because someone sold it to you. You actively researched what an ETF is, understood the underlying asset, and made an informed decision. Through that research, you learned that this asset has historically experienced drawdowns of 70% to 80% multiple times. And investors like those at Vanguard regularly contribute fixed amounts to their investment accounts every two weeks—many simply aiming to reach a target asset allocation. Before the ETF launched, we discussed what would happen with allocations of 1%, 3%, or 5%? This isn’t like Bitcoin maximalists holding 80% of their net worth. For these ETF holders, it’s just a small portion of their portfolio. So if you only have a 3% position, even a 50% drop is painful but manageable—you won’t panic-sell. I believe what’s actually happening now is that people are buying more during rebalancing. If your target allocation is 5%, and a 50% drop brings it down to 2.5%, when you rebalance your portfolio quarterly or annually, you’ll buy back in to restore the 5% allocation. The same applies on the upside. As Bitcoin ETFs grow in importance, this is one reason we’ll see price volatility gradually smooth out. Theoretically, you shouldn’t see extreme speculative bubbles at the top or full-blown crashes anymore. This is exactly what we’re seeing: no 70% pullback below $40,000, and no extreme speculative mania. Everyone says this, but I think you’ve seen it in the ETFs—and there’s a solid reason why it’s happening.
Host: Can you share who is buying and holding these ETFs? We’ve seen it in university endowments and pension funds, and we’ve heard that IBIT is Harvard’s largest holding?
James: Yes, with these 13F filings, you can only see equity holdings. Fortunately, since ETFs fall under the scope of this reporting standard, we can see who holds ETFs—but only long positions. Hedge funds are major users of ETFs, yet on a net basis they are often short. So I should note that we don’t know the specifics of Harvard’s endowment, but they do hold a significant portion. Yale also holds these assets, including Ethereum. The largest buyers remain investment advisors, wealth advisors, and broker-dealers—typically middle- to high-income individuals who work with financial advisors. Still, 13Fs show only a limited picture. By the end of September 2025, we knew the identity of only about 27% of holders. Even with some outflows from hedge funds and advisors in the fourth quarter, that number has now dropped below 25%. This means we only know the identity of roughly one-quarter of holders, implying that the vast majority are held by retail investors through brokerage platforms like Robinhood or Schwab, or by international institutions that aren’t required to file 13Fs. As for institutional holders, most are investment advisors—who, at the 13F level, are classified as institutions.
Host: There are 11 approved ETFs, right? How are they performing now? And is Morgan Stanley about to enter the market?
James: Yes, there may already be twelve of them. You can also include futures products, buffered products with option caps, and covered call products—Bitcoin-related products have formed a complete sub-ecosystem, all performing well. Many people ask how there can be so many products, but it depends on the amount of capital flowing in; even the smallest have hundreds of millions of dollars in assets and are profitable. In terms of rankings, BlackRock’s IBIT is far ahead in trading volume, assets under management, capital inflows, and other metrics. Following behind are VanEck’s HODL, Bitwise, Fidelity’s FBTC, and others—all of these funds are operating successfully. For ETFs, the key metrics are whether they’re attracting capital, have sufficient assets under management, and are profitable—all of which are currently happening.
Then you mentioned that Morgan Stanley is about to launch a Bitcoin ETF, which is a huge development. Recall the slogan from 2017 was “Buy Bitcoin, Short Banks,” and now one of the largest banks in the U.S. is about to launch a Bitcoin ETF. It’s extremely rare for Morgan Stanley to issue an ETF under its own brand—they have “assets under management,” with over $6 trillion in client assets on their platform. When clients ask about Bitcoin and want to include it in their portfolios, it makes perfect sense for them to do it themselves rather than hand over funds to another issuer, so they’re naturally moving forward aggressively. Although some Bitcoin supporters feel that banks are co-opting something they once sought to disrupt, this is undeniably a major milestone.
Host: Do you think this is the beginning of all major banks entering this space and launching their own ETFs?
James: To be honest, I was surprised when Morgan Stanley filed for ETFs on Bitcoin, Ethereum, and Solana all at once. They’re entering late, and at this point, the product doesn’t seem differentiated—it’s just another spot product. There are already other applications in the market aiming to offer unique Bitcoin exposure, such as covered call strategies, as mentioned earlier. There are also products combining Bitcoin with carbon credits, designed to appeal to institutions concerned about the environmental issues associated with Bitcoin mining—we don’t need to dive deep into that, but you can understand why institutions would want such a product.
Based on the current application documents, it appears to be just another ordinary spot Bitcoin product. There’s relatively little differentiation here—at least, I don’t see any, and I’m open to being corrected. So it’s interesting that they’re entering this space at this stage, but as I said, they have the advantage of an existing customer base. I don’t think other banks will necessarily follow suit. Morgan Stanley is particularly large. But I’m adding this caveat—I never expected Morgan Stanley to launch this in the first place.
Host: Have there been any changes regarding physical redemption?
James: Great question, and this is becoming increasingly important. In the early years, issuers were not allowed to request physical redemptions (exchanging Bitcoin for ETF shares, and vice versa), but now it is permitted. Previously, you had to go through the “cash creation” process, which involved a lot of unnecessary cash flow steps because the specific banks and market makers providing liquidity for these ETFs were not allowed to access the crypto market. As a result, they had to rely on cash flows and needed subsidiaries capable of handling cash transactions. The ETF itself had to go out and purchase Bitcoin, typically through a prime brokerage desk, such as CoinDesk or another service provider.
Host: And now you can adopt the model we just discussed.
James: Yes, product efficiency has become extremely high. If you buy IBIT or FBTC in the U.S., the spread is only a few cents, with virtually no trading fees—this is significant for ETF efficiency. They are now connecting to the physical market. Currently, only authorized participants—large banks—can do this, but for example, VanEck has a gold product where, if retail investors reach a certain holding threshold, they can have gold delivered directly to their doorstep. So in the coming years, I have no doubt that if you hold $10,000 to $20,000 in a Bitcoin ETF and are on the approved list, they will simply 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 using centralized exchanges.
Host: One thing I’d like to ask—since most of these ETF issuers use the same custodian, isn’t that a form of risk?
James: Yes. Coinbase holds the majority of Michael Saylor’s Bitcoin, as well as about two-thirds to three-quarters of the ETF Bitcoin. Although many applications are now trying to diversify custodians—such as BlackRock selecting three staking providers, and BitGo and Gemini serving as custodians for certain firms—the reality is that custody remains heavily concentrated at Coinbase. So, much of the ETF holding data you see is stored in Coinbase’s vaults. But this is the Lindy effect: the longer you’ve been in the market, the more trusted you become, and issuers continue to choose them in this process. This is something I’m closely watching—and slightly concerned about.
Host: Many Bitcoin supporters are disappointed that gold has outperformed Bitcoin as a hedge against inflation and currency devaluation. How are the fund flows for gold ETFs?
James: Previously, we discussed outflows from Bitcoin ETFs between October and February, while gold saw the opposite—funds flooded into gold ETFs, and the price of gold broke above $5,000. Ironically, the trend has now reversed: significant funds are now flowing out of gold, but just like with Bitcoin, the amount that flowed in previously far exceeds what has flowed out over the past few weeks. Over the last eight months, Bitcoin and gold have shown nearly inverse fund flows. During this period, Bitcoin’s performance closely mirrored that of software stocks. When Bitcoin dropped below $60,000, no one bought the dip; everyone waited, and funds only re-entered once it stabilized at the bottom. Gold has followed the same pattern—people are now withdrawing. This is because investors tend to sell what has appreciated: if you want to hold cash due to events like those in Iran, would you sell an asset that has dropped 50% or one that has gained 50%? Clearly, the latter. This is the market’s tendency toward mean reversion.
Host: What is the largest gold ETF?
James: GLD. It’s the SPDR Gold Trust, a collaboration between State Street Bank and the World Gold Council, but they also have GLDM, which is a mini version with much lower management fees. Then there’s BlackRock’s IAU, and its mini, cheaper version IUM. But they all do the same thing—basically just storing gold in a vault somewhere in London.
Host: How do they compare in size and liquidity to Bitcoin ETFs?
James: Liquidity is about the same. But the scale of gold ETFs is much larger. The first gold ETF was launched in 2004, allowing people to make long-term gold allocations for the first time and triggering a bull market that lasted until 2011. In December 2024, the total size of bitcoin ETFs nearly caught up to gold ETFs, falling just a few billion dollars short. However, following the subsequent sell-off of bitcoin and a "double boost" of price surge and capital inflow into gold in 2025, the size of gold ETFs is now nearly twice that of bitcoin ETFs.
Host: Do you think Bitcoin can catch up?
James: Our view is that Bitcoin ETFs will eventually surpass gold ETFs in scale, but it’s hard to say right now. People buy Bitcoin ETFs for various reasons: some see it as “digital gold” or a diversification tool, while others resonate with Michael Saylor’s narrative around digital assets as credit. In contrast, gold has a much more limited use case—as a diversification tool and hedge against currency depreciation. Meanwhile, the market currently treats Bitcoin as a “risk-on growth asset.” So in a portfolio, Bitcoin can act as a “spice” for liquidity-driven growth. I believe they’ll eventually catch up to gold, but right now the trend is going the other way.
Host: Everyone knows that Bitcoin makes up a small portion of investment portfolios. But I’ve found that almost no one holds gold—financial advisors currently have very low allocations to gold. Do you think this will change? Will it gradually increase to a 3–5% allocation?
James: Yes. The problem with gold is that many advisors see it as just a “pet rock” with no reason to hold it. But I think this is changing, especially as we move toward a multipolar world. Numerous studies show that replacing bonds in a 60/40 portfolio with gold yields nearly identical long-term returns. Some complain that gold didn’t rise during surging inflation because, like Bitcoin, gold has almost zero short-term correlation with inflation and isn’t a short-term hedge. It’s a long-term hedge against currency depreciation—and due to 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 ideal for diversification. Given how volatile markets have been, pullbacks in precious metals even look a bit like digital assets, especially silver.
Host: Yes, could you take a step back and share your perspective on the broader market? The stock market has been performing strongly, but private credit has seen volatility affecting valuations. What do you think will happen over the next 6 to 12 months?
James: There are always people in the market highlighting various geopolitical and AI-displacement crises, which makes them seem clever. But I’m a long-term bull; my underlying logic is that people work hard every day to improve the world, so I continue to allocate my capital to stocks and risk assets. As for private credit, publicly traded Business Development Companies (BDCs) are currently trading at discounts exceeding 20%, indicating widespread concern. Where there’s smoke, there’s fire—real fraud has already emerged in private credit. Moreover, private credit is heavily skewed toward the software industry, and as AI drives the cost of developing new software toward zero, investors worry these software companies won’t be able to repay their loans. The market is already pricing in the severe issues in private credit; these lock-up products have extremely poor liquidity, and once you want to exit, you simply can’t get your money out. I hope financial advisors have fully disclosed this illiquidity risk when selling these products.
Host: I’d also like to ask about derivative Bitcoin-related products, such as Strategy’s digital credit. 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 equity and debt of digital asset financial companies. Although inflows have not been substantial yet, if this sector continues to grow, they will likely eventually be bundled into ETFs focused on companies with crypto and Bitcoin balance sheets.
Host: We’re in a chaotic time when everyone is feeling anxious—geopolitical crises, fear of being replaced by AI, and more. What are you most focused on, 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 move significantly toward diversification. Last year, everyone was talking about the Magnificent Seven, but in reality, they’ve underperformed since Q3 2025. Better performers have been small-cap stocks, physical assets, and international equities. So I’d say diversification is extremely important.
Moreover, over the past six months, very little has been truly effective as a hedge or negatively correlated: Bitcoin fell, gold fell, and bonds failed to provide diversification. Cash is now the only asset left that offers diversification. This is the “death of hedging”—for most people, aside from engaging in extremely complex options derivatives, the only way to respond is to maintain a diversified portfolio and hold some cash.
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