Source: Coin Stories
Compiled by: Felix, PANews
James Seyffart, Senior ETF Analyst at Bloomberg Intelligence, once again appeared on "Coin Stories," providing an in-depth analysis of the latest developments in the ETF space: from the surprising "diamond hands" strategy of Bitcoin ETF holders during a 50% drop, to the milestone decision by Morgan Stanley to launch its own Bitcoin ETF.
Host: It's been a while since we discussed ETFs. Let's start with Bitcoin. What's the current situation with Bitcoin ETFs?
James: Just discussing fund flows might not be that exciting, but I think it's beneficial to occasionally provide a periodic recap for you and the listeners. About a year ago, around April 2025 (or a bit earlier), we experienced a crash. From that low point until around October 10th, roughly $250 to $300 billion flowed into Bitcoin ETFs, which was excellent performance. But starting around October 10th, about $9 billion flowed out. The media was all over it, talking as if it were the end of the world, saying funds were fleeing en masse. But if you step back, you see that over $250 billion had flowed in during the previous months; $9 billion flowing out isn't a huge deal. Funds flow in and out; 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 significant inflow. A lot of the outflows have reversed, with about $2 to $2.5 billion flowing back in. Not all outflows have reversed, but the situation has stabilized, prices have become more stable, and we're almost setting higher lows every week. So Bitcoin ETFs are performing very well; they've handled this situation admirably, with no dislocations in the market. Buying is still happening. We know 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 might be almost entirely unrelated to price action. It's more about basis trading: when you short futures and buy spot, you can capture a kind of risk-free return, which previous guests have discussed. But I want to emphasize: if an asset drops over 50%, and the outflow ($9 billion) is less than 15% of the total inflows in the first two years after launch, that's really fantastic. So what ultimately happened was: the OGs sold Bitcoin, and the Bitcoin ETF holders were actually the true "diamond hands," holding on very firmly.
Host: This is exactly what I wanted to focus on. Because I saw you and Eric Balchunas both tweet that investors weren't expected to withstand such a high 50% drawdown, but in the ETF world, they did, holding on instead of selling.
James: Yes. We said when the ETFs launched that many naysayers thought "the holders will be weak hands, they'll sell at the first sign of trouble." But the reality is, if you are an ETF holder, you probably weren't sold this ETF. You actively sought to understand what an ETF is, what the underlying asset is, and then made a decision. Through that understanding, you learned that this asset has historically experienced 70% to 80% drawdowns multiple times. And investors like those at Vanguard, they put money into their investment accounts every two weeks automatically; many are just trying to reach a set asset allocation target. We discussed before the ETF launch, what if it's a 1%, 3%, or 5% allocation? It's not like Bitcoin maximalists who might have 80% of their net worth in it. For these ETF holders, it's just a small part of their portfolio. So if it's only a 3% allocation, even if it drops 50%, it stings a bit, but it's not a big deal; they won't panic sell. I think what's happening now is that people are actually adding to their positions when rebalancing their portfolios. If your target is a 5% allocation and it gets halved to 2.5%, when you do your quarterly or annual portfolio rebalance, you'll buy back to get to 5%. The same happens on the upside. As Bitcoin ETFs grow in importance, this is one reason why we will see price fluctuations smooth out. Theoretically, you shouldn't see extreme peak manias anymore, nor should you see utter crashes. This is what's happening now; we didn't see a 70% crash below $40k, nor did we see extreme peak mania. Basically everyone says this, but I think you're seeing it in the ETFs, and there's good reason for it to happen.
Host: Can you share who is buying and holding these ETFs? We've seen it in university endowments and pension funds, and heard IBIT is Harvard's largest holding?
James: Yes, these 13F filings only show equity holdings. Fortunately, because ETFs fall under that reporting standard, we can see who holds ETFs, but we only see long positions. Hedge funds are a big user group of ETFs, but on a net basis they are often short. So I must caution, we don't know the specifics of the Harvard endowment, but they do hold a significant portion. Yale also holds these assets, including Ethereum. The biggest buyers are still investment advisors, wealth advisors, and broker-dealers, meaning typically upper-middle-income ordinary people who have an advisor managing their money. Still, 13F reveals limited information. As of the end of September 2025, the proportion of holders we knew about was only about 27%. Even after seeing some outflows from hedge funds and advisors in Q4, that number has now dropped to about 25% or below. This means we only know the identity of about a quarter of the holders, which also implies the vast majority are held by retail through brokerage platforms like Robinhood or Schwab, or by international institutions that don't need to file 13Fs. On the institutional side, most are investment advisors; at the 13F level, they are the institutions.
Host: There were 11 approved ETFs, right? How are they performing now? And Morgan Stanley is about to enter the fray?
James: Yes, there might be 12 now. You can also count futures products, buffered products with option caps, and covered call products; Bitcoin-related products have formed a complete sub-ecosystem, and all are performing well. Many people say how can there be so many products, but it depends on the inflow volume; even the smallest have a few hundred million dollars and are profitable. In terms of ranking, BlackRock's IBIT is far ahead in trading volume, assets, inflows, all metrics. Following behind are VanEck's HODL, Bitwise, Fidelity's FBTC, etc. All these funds are functioning well. For ETFs, the main thing is whether they are gathering assets, if the asset size is sufficient, and if the product is profitable, and all that is happening.
Then you mentioned Morgan Stanley is about to launch a Bitcoin ETF, which is a big deal. Remember the 2017 slogan was "Long Bitcoin, Short the Banks," and now one of the largest US banks is about to launch a Bitcoin ETF. It's very rare for Morgan Stanley to issue an ETF under their own brand; they have "built-in assets" – their platform has clients with over $6 trillion in assets. When clients ask about Bitcoin and want to include it in their portfolio, since they can do it themselves instead of giving money to other issuers, they are naturally pushing ahead. Although some Bitcoin supporters feel the banks are co-opting what they once wanted to disrupt, this is absolutely a major event.
Host: Do you think this is the beginning of all major banks starting to enter this space and issuing their own ETFs?
James: Honestly, I was surprised when Morgan Stanley applied for Bitcoin, Ethereum, and Solana ETFs simultaneously. They are entering very late, and currently the product doesn't seem differentiated; it's just another spot product. There are other products in the application pipeline aiming to offer unique Bitcoin plays, like the covered call stuff mentioned earlier. There are also ones combining it with carbon credits, aimed at institutions worried about Bitcoin mining issues – we don't need to delve into that topic, but you understand why an institution might want that product.
From the current application documents, it seems like just another plain vanilla spot Bitcoin product. Relatively undifferentiated, at least I don't see it, and I'm not afraid to be corrected. So it's interesting they are entering at this stage, but as I said, because they have the advantage of built-in clients. I don't necessarily think other banks will follow suit. Morgan Stanley is particularly large. But I also had a caveat; I didn't expect Morgan Stanley to launch this either.
Host: Has there been a change regarding in-kind redemptions?
James: Good question, this is becoming increasingly important. In the first few years, issuers wanting in-kind redemptions (exchanging Bitcoin for ETF shares and vice versa) were not allowed; now it is permitted. Previously you had to go through the "cash creation" process. There were a bunch of unnecessary cash flow steps because the specific banks and market makers authorized to create units in these ETFs were not allowed to touch crypto markets. So they had to go through cash flows, and had to have subsidiaries that could handle that cash. The ETF itself had to go out and buy Bitcoin, usually through a prime broker desk, like Coinbase or some other service provider.
Host: And now they can use the model we just discussed.
James: Yes, the product efficiency becomes super high. If you buy IBIT or FBTC in the US, the spread is just a few cents, and there's almost no trading fee, which is significant for ETF efficiency. Now they are connecting to the physical market. Currently only authorized participants, the big banks, can do it, but for example VanEck has a gold product where, if a retail investor holds a certain amount, they can have the gold delivered to their doorstep. So within the next few years, I have no doubt that if you have $10k to $20k in a Bitcoin ETF, and are whitelisted/approved, they will just send the Bitcoin directly to your wallet address. Unlike gold which is heavy, Bitcoin is sent instantly. Due to competition among issuers, this might become a cheaper, more efficient way to get Bitcoin exposure than through centralized exchanges in the future.
Host: One thing I want to ask: most of these ETF issuers use the same custodian, isn't that a kind of risk?
James: Yes. Coinbase custodies most of Michael Saylor's Bitcoin, and also custodies about 2/3 or 3/4 of the ETF Bitcoin. While there are many applications now trying to diversify custodians – for example, BlackRock selected three staking providers, BitGo and Gemini are custodians for some companies – ultimately, it's still highly concentrated at Coinbase. So the data you see on these ETF holdings, a large portion is in Coinbase's vaults. But this is the "Lindy effect"; the longer you've been in the market, the more trusted you are, and issuers are still choosing them through this process. This is something I'm watching and am slightly concerned about.
Host: Many Bitcoin supporters are disappointed that gold has outperformed Bitcoin as an inflation hedge and against currency debasement. How are the fund flows for gold ETFs?
James: Earlier we talked about the Bitcoin ETF outflows from October to February; during that period, gold was the exact opposite, with funds flooding into gold ETFs like crazy. The gold price also broke above $5000. But ironically, the direction has reversed now, with significant outflows from gold, but just like Bitcoin, the inflows prior were much larger than the outflows in the past few weeks. Over the past 8 months, Bitcoin and gold fund flows have been almost negatively correlated. Because during this time Bitcoin was trading very closely to software stocks. When Bitcoin broke below $60k initially, no one was buying the dip; everyone was watching, and funds only re-entered when it bottomed and consolidated. Gold is the same; people are pulling out now. This is because people tend to sell what has gone up; for example, if due to the Iran event you want to hold cash, do you sell the asset that's down 50% or the one that's up 50%? Obviously the latter. This is the market reverting to the mean.
Host: What is the largest gold ETF?
James: GLD. It's the SPDR Gold Trust, a collaboration between State Street and the World Gold Council, but they also have GLDM, a mini version with much lower management fee. Then there's BlackRock's IAU, and the mini cheap version IUM. But they all do the same thing, typically just holding the gold in a vault in London, that's it.
Host: How do they compare in size and liquidity to Bitcoin ETFs?
James: Liquidity is similar. But gold ETFs are much larger in size. The first gold ETF launched in 2004; it allowed people to make long-term allocations to gold for the first time and brought a bull run that lasted until 2011. In December 2024, Bitcoin ETF total size came extremely close to gold ETFs, only tens of billions apart. But following the subsequent Bitcoin sell-off, and with gold experiencing a price surge and fund inflow "double whammy" in 2025, gold ETF size is now almost double that of Bitcoin ETFs.
Host: Do you think Bitcoin can catch up?
James: Our view is that Bitcoin ETFs will eventually surpass gold ETF size, but it doesn't look great right now. People buy Bitcoin ETFs for many reasons: some see it as "digital gold" or a diversification tool, some buy into Michael Saylor's digital asset credit narrative. In contrast, gold's use case is singular (diversification tool and currency debasement hedge). Also, the market is currently trading Bitcoin as a "risk-on growth asset." So Bitcoin can be the "spicy sauce" for liquidity growth in a portfolio, so I think they will eventually catch up to gold, it's just that the current trend is opposite.
Host: Everyone knows Bitcoin's allocation in portfolios is small. But I found that almost no one holds gold either. Investment advisors currently have very low gold allocations. 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 do think this will change, especially because we are moving towards a multipolar world. There is research showing that if you replace bonds in a 60/40 portfolio with gold, the performance outcome long-term is almost the same. People complain gold didn't rise when inflation spiked because gold, like Bitcoin, has almost zero short-term correlation with inflation; it's not a short-term safe haven. It's a long-term store of value against currency debasement, and due to its low correlation, it's an excellent diversifier. Bitcoin has a correlation of only about 0.2 to 0.3 with other traditional assets, making it great for diversification. Because the market has been so volatile, the pullback in precious metals even looks a bit like digital assets, especially silver.
Host: Yes, can you step back and talk about your view on the broader market? Because the stock market is performing strongly, but there's been turbulence in private credit affecting valuations. What do you think about the next 6 to 12 months?
James: There are always people on the market warning about various geopolitical and AI replacement crises, which easily makes them sound smart. But I am a long-term bull; the underlying logic is that everyone works hard every day to improve the world, so my money remains allocated to stocks and risk assets. As for private credit, publicly traded Business Development Companies (BDCs) are currently trading at discounts of over 20%, which shows significant concern. Where there's smoke, there's fire; there is real fraud happening in private credit. Also, private credit is heavily skewed towards the software industry, and with AI driving the cost of developing new software towards zero, people worry these software company loans won't be repaid. The market is pricing in serious problems in private credit; these are locked-up products with extremely poor liquidity; once you want to exit, you can't get your money out. Hopefully investment advisors fully explained this illiquidity risk when selling these products.
Host: I also wanted to ask about those derived Bitcoin-related products, like Strategy's digital credit. Do you think we will see ETFs containing these perpetual preferred stock instruments in the future?
James: Yes, there are preferred stock ETFs on the market now, and there are a few ETFs investing in equity and debt of digital asset treasury companies. Although inflows aren't huge yet, if this space continues to grow, they will likely eventually be packaged into ETFs focused on crypto and Bitcoin balance sheet companies.
Host: We are in a chaotic period where everyone is nervous – geopolitical crises, fear of being replaced by AI, etc. What are you watching most closely, what do you want people to know?
James: I am closely watching where people are putting their money. Ironically, we are seeing the market move极大ly towards diversification. Last year everyone talked about the Magnificent 7 (MAG 7), but actually since Q3 2025 they have performed averagely. What performed better were small caps, real assets, and international stocks. So I would say diversification is extremely important.
Furthermore, for the past 6 months, almost nothing has truly acted as a hedge or been negatively correlated: Bitcoin fell, gold fell, bonds didn't provide diversification either. The only thing that provided diversification was cash. This is the "death of hedges"; apart from using extremely complex option derivatives, ordinary people can only rely on maintaining a diversified portfolio and holding some cash to cope.
Related reading: a16z Wealth Manager: Embrace 40% Market Drawdowns, Don't Invest 80% of Your "First Pot of Gold" in a Friend's Startup
