Source: Coin Stories

Organizer: Felix, PANews

Bloomberg's senior ETF analyst James Seyffart once again guest stars on "Coin Stories," diving deep into the latest trends in the ETF space: from the unexpectedly "diamond hands" strategy of Bitcoin ETF holders during a 50% drop, to Morgan Stanley's milestone decision to launch its own Bitcoin ETF.

Host: It has been a while since we've discussed ETFs. Let's start with Bitcoin; what is the current situation for Bitcoin ETFs?

James: Simply talking about the inflow and outflow of funds may not be that exciting, but I think it’s beneficial to occasionally give a phase review for you and the audience. About a year ago, we experienced a significant drop in April 2025 (or earlier), and from the low point at that time to October 10, around $25 to $30 billion flowed into Bitcoin ETFs, performing exceptionally well. However, starting from October 10, approximately $9 billion flowed out. At that time, the media was discussing it as if it were the end of the world, saying that funds were fleeing en masse. But if you take a step back, you’d see that in the previous months, over $25 billion had flowed in, and $9 billion flowing out isn’t a big deal. Funds come in and out; that’s how ETFs operate. You want to see an upward long-term trend. So, from February 23 to late March, there was indeed quite a large inflow of funds. Many of the outflows have reversed, with about $2 to $2.5 billion coming back in. Though not all outflows have reversed, the situation has stabilized, prices have become more stable, and we are setting higher lows almost every week. Thus, Bitcoin ETFs have performed very well, navigating the situation expertly without any dislocation in the market. Purchase activities are still happening. From the 13F filings, we’ve learned 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 just mentioned might be almost entirely unrelated to price movement. It's more about basis trading: that is, when you short futures and buy spot, you can earn a kind of risk-free return. Many guests have discussed this point before. But I want to emphasize that if an asset drops more than 50%, and the outflow of funds ($9 billion) is less than 15% of the total inflow during the first two years after launch, that’s really impressive. So what ultimately happened is: OGs sold Bitcoin, while the holders of Bitcoin ETFs are the real "diamond hands," they are holding on very firmly.

Host: That’s exactly what I wanted to focus on. Because I saw both you and Eric Balchunas tweeting that nobody expected investors to withstand a drawdown of up to 50%, but they have done it in the world of ETFs, holding on rather than selling off.

James: Yes. We mentioned when the ETF was launched that many skeptics thought, “Holders will be weak, and will sell at the first sign of trouble.” But the truth is, if you’re an ETF holder, you likely didn’t buy this ETF because someone was pushing it on you. You actively sought to understand what an ETF is, what the underlying assets are, and then made a decision. Through this understanding, you realized that this asset has experienced drawdowns of 70% to 80% multiple times in history. And investors with Vanguard, for instance, contribute fixed amounts to their investment accounts every two weeks; many do this just to reach a set asset allocation goal. We discussed before the ETF launch what would happen with a 1%, 3%, or 5% allocation? This is not like Bitcoin proponents holding 80% of their net worth. For these ETF holders, it’s just a small part of their portfolios. So if it’s only a 3% position, even with a 50% drop, while it stings a bit, it’s not a big deal, and they won’t sell off to flee. What I think is happening now is that people are actually adding more when rebalancing their portfolios. If your target is a 5% allocation, after a cut in half to 2.5%, when you rebalance quarterly or annually, you will buy back to reach that 5% allocation again. The same goes for when it rises. With the growing importance of Bitcoin ETFs, this is one reason we will see price volatility decrease. Theoretically, you shouldn’t see extreme euphoria at the peak again, nor should you see a complete crash. That’s what is happening currently; we haven’t seen a 70% drop below $40,000, nor extreme euphoria at the peak. Basically, everyone says this, but I think you see it in the ETFs, and there’s ample reason for it to happen.

Host: Can you share who is buying and holding these ETFs? We have seen it in university endowments and pension funds; I heard IBIT is Harvard's largest holding?

James: Yes, in these 13F filings, you can only see equity holdings. Fortunately, since ETFs fall under the standard for that report, we can see who holds ETFs, but we can only see long positions. Hedge funds are a major user group for ETFs, but in terms of net value, they often short them. So I have to remind you, we don’t know the specifics for Harvard’s endowment, but they do hold a significant proportion. Yale also holds these assets, including Ethereum. The largest buyers remain investment advisors, wealth advisors, and broker-dealers, which means typically middle to upper-income ordinary people who have advisors manage their finances. Still, the 13F can only show limited information. As of the end of September 2025, the known holder proportion is about 27%. Even in the fourth quarter, we saw slight outflows from hedge funds and advisors, and now that number has dropped to below about 25%. This indicates that we know the identities of about a quarter of the holders, which also means that the vast majority is held by retail investors through brokerage platforms like Robinhood or Schwab, or by international institutions that do not need to file 13F. As for the institutional side, most are investment advisors; at the 13F level, they are considered institutions.

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

James: Yes, there may now be 12. You can also count futures products, buffered products with options caps, and covered call products; Bitcoin-related products have formed a complete sub-ecosystem, and all are performing well. Many people wonder how there can be so many products, but it depends on the amount of inflow, even the smallest have hundreds of millions of dollars and are profitable. In terms of rankings, BlackRock's IBIT leads in trading volume, assets, inflows, and various metrics. The next in line are Vaneck's HODL, Bitwise, Fidelity's FBTC, etc., and all those funds are functioning well. For ETFs, the main thing is whether it attracts funds, whether the asset scale is sufficient, and whether the product is profitable; all of this is happening now.

Then you mentioned that Morgan Stanley is about to launch a Bitcoin ETF, which has a significant impact. Recall that the slogan in 2017 was "Go long Bitcoin, go short banks," yet now one of the largest banks in the US is about to launch a Bitcoin ETF. It is rare for Morgan Stanley to issue an ETF under its own brand; they have "self-owned assets," with clients having over $60 trillion in assets on their platform. When clients inquire about Bitcoin and want to include it in their portfolios, since they can do it themselves without giving money to other issuers, they are naturally pushing it forward. Although some Bitcoin supporters feel that banks are assimilating what they once sought to overthrow, it is certainly a big deal.

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

James: Honestly, I was surprised when Morgan Stanley simultaneously applied for Bitcoin, Ethereum, and Solana ETFs. They are coming into the game quite late, and currently, the products don't seem differentiated; they are just another spot product. There are other products on the market applying for unique Bitcoin plays, like those previously mentioned with covered calls. There's also a combination with carbon credits, which cater to institutions worried about issues related to Bitcoin mining; we don’t need to delve into that topic, but you can understand why institutions would want such products.

From the current filing documents, it seems like just another ordinary spot Bitcoin product. Relatively speaking, there isn't much differentiation; at least I haven’t seen it, and I'm not afraid of being corrected. So it's interesting that they are entering this space at this stage, but like I said, they have the advantage of self-sourced clients. I doubt that other banks will necessarily follow suit. Morgan Stanley is particularly large. But I also brought a supplementary premise; I didn’t expect Morgan Stanley to launch this.

Host: Has there been a change regarding physical redemptions?

James: Good question; this is becoming increasingly important. In the early years, issuers were not allowed to do physical redemptions (exchanging Bitcoin for ETF shares and vice versa), but now it is permitted. Previously, you had to go through a "cash creation" process. It involved a lot of unnecessary fund circulation steps because the specific banks and market makers doing market-making in these ETFs were not allowed to touch the crypto market. So they had to go through cash transactions, and they had to have subsidiaries capable of handling that cash. The ETFs themselves had to go out and purchase Bitcoin, usually through a prime broker's trading desk, like CoinDesk or some other service providers.

Host: And now the model we just discussed can be adopted.

James: Yes, product efficiency has become extraordinarily high. If you purchase IBIT or FBTC in the US, the spreads are just a few cents, and there are almost no trading fees, which is significant for ETF efficiency. They are now connecting to the physical market. Currently, only authorized participants, which means large banks, can do this, but, for example, VanEck has a gold product that delivers gold directly to your doorstep as long as retail investors 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 Bitcoin ETFs, as long as you are whitelisted, they will directly send Bitcoin to your wallet address. Unlike gold, which is heavy, Bitcoin can be sent instantly. Due to the 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 want to ask, most of these ETF issuers use the same custodian; isn’t that a kind of risk?

James: Yes. Coinbase has custody of most of Michael Saylor’s Bitcoin and about 2/3 or 3/4 of ETF Bitcoin. Although there are many applications trying to diversify custodians now, for example, BlackRock has chosen three staking providers, and BitGo and Gemini are custodians for some companies, ultimately, it is still highly concentrated in Coinbase. So a large part of the data you see regarding ETF holdings is stored in Coinbase's vaults. But that’s the "Lindy Effect"; the longer you exist in the market, the more trust you gain, and issuers are still choosing them in this process. This is indeed something I’m watching and somewhat concerned about.

Host: Many Bitcoin supporters are disappointed that gold has outperformed Bitcoin as an inflation hedge and a safeguard against currency devaluation. How is the fund flow situation for gold ETFs?

James: Previously, from October to February, we saw outflows from Bitcoin ETFs, while gold experienced the opposite, with funds flooding into gold ETFs during this period. Gold prices also soared past $5,000. But ironically, the direction has now reversed, with a large amount of funds flowing out of gold, but just like Bitcoin, the amount that flowed in previously far exceeds what has flowed out in the past few weeks. In the past 8 months, the fund flows for Bitcoin and gold have been almost negatively correlated. Because during this time, Bitcoin’s performance was very close to software stocks. When Bitcoin fell below $60,000, no one was buying the dip; everyone was watching until it bottomed out and traded sideways before funds re-entered. The same goes for gold; people are pulling out now. This is because people tend to sell what has appreciated, like if you want to hold cash due to events in Iran, would you sell an asset that has dropped 50% or one that has gained 50%? Obviously the latter. That's the phenomenon of reversion to the mean in the market.

Host: What is the largest gold ETF?

James: GLD. It is the SPDR Gold Trust in collaboration with 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 the mini cheap version IUM. But they all do the same thing, typically just holding gold in some vaults in London, and that's it.

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

James: The liquidity is similar. But gold ETFs are much larger in scale. The first gold ETF was launched in 2004, allowing people to make long-term allocations to gold and leading to a bull market that lasted until 2011. In December 2024, the total scale of Bitcoin ETFs was rapidly approaching gold ETFs, just a few billion dollars short. But following the sell-off in Bitcoin and a "double positive" for gold in 2025, where it experienced soaring prices and inflows, the scale of gold ETFs 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 ETFs in scale, but it doesn’t look promising at the moment. There are various reasons people buy Bitcoin ETFs: some value it as "digital gold" or a risk diversification tool, while others identify with Michael Saylor’s narrative on digital asset credibility. In contrast, gold’s use case is quite singular (diversification tool and hedge against currency devaluation). Meanwhile, the market is currently trading Bitcoin as a "risk growth asset." Thus, Bitcoin can serve as a "spicy sauce" in portfolios aiming for liquidity growth, so I believe they will eventually catch up to gold; it’s just that currently, the trend is quite the opposite.

Host: Everyone knows Bitcoin occupies a small share of investment portfolios. But I discovered that hardly anyone holds gold. Investment advisors currently have a very low allocation to gold. Do you think this will change? Will it gradually increase to 3-5% allocations?

James: Yes. The issue with gold is that many advisors feel it’s just a "pet rock" without a reason to hold. But I think this will change, especially as we are heading into a multipolar world. Many studies show that if bonds are replaced with gold in a 60/40 portfolio, the long-term return results are almost the same. Some complain that gold didn’t rise during the surge in inflation, but like Bitcoin, gold has almost zero correlation with inflation in the short term and is not a short-term hedge. It is a long-term tool against currency devaluation because of its low correlation, making it an excellent risk diversification asset. Bitcoin has a correlation with other traditional assets of only about 0.2 to 0.3, making it highly suitable for diversifying risks. Due to a highly volatile market, the drawdowns in precious metals even appear somewhat like digital assets, especially silver.

Host: Yes, can you take a step back and share your thoughts on the overall market? Because the stock market is performing strongly, but private credit appears to be causing valuation shocks. What do you think will happen in the next 6 to 12 months?

James: There are always people in the market warning about various geopolitical crises and the risk of being replaced by AI, which can easily make them seem very smart. But I am a long-term bull; the underlying logic is that people are working hard every day to improve the world, so my capital is still allocated to stocks and risk assets. As for private credit, publicly traded business development companies (BDCs) are currently trading at over a 20% discount, indicating significant concern. There is no smoke without fire; there have already been real fraudulent activities in private credit. Moreover, private credit is severely biased towards the software industry. As AI brings the cost of creating new software close to zero, there are concerns that these software companies’ loans may not be repaid. The market is pricing in serious problems in private credit; these locked-in products have extremely poor liquidity, and once you want to exit, there's no way to withdraw your money. I hope advisors adequately explain this illiquidity risk when selling these products.

Host: I also want to ask about those derivative Bitcoin-related products, like Strategy's digital credit. Do you think we will see ETFs that include these perpetual preferred stock tools in the future?

James: Yes, there are already preferred stock ETFs in the market, and a few ETFs investing in equity and debt of digital asset financial companies. Although the inflows are not significant yet, if this track continues to grow, they will likely be eventually packaged into ETFs focusing on crypto and Bitcoin balance sheet companies.

Host: We are in a chaotic time when everyone is very anxious, with geopolitical crises, fears of being replaced by AI, etc. What are you closely monitoring, and what do you want everyone to know?

James: I am closely watching where people put their money. Ironically, we see the market diversifying greatly. Last year, everyone was discussing the tech giants (MAG 7), but in reality, they have been performing mediocrely since the third quarter of 2025. What has performed better are small-cap stocks, tangible assets, and international equities. So I want to say that diversification is extremely important.

Additionally, there has been almost nothing in the past 6 months that can genuinely hedge or present negative correlation: Bitcoin dropped, gold dropped, and bonds did not act as a diversifier. The only thing left to diversify is cash. This is the "death of hedges," and aside from executing extremely complex options derivatives, ordinary people can likely only rely on keeping diversified portfolios and holding some cash to cope.

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