Welcome and Thanks

Good morning, and welcome to Deep Flow: the weekly edition of Flow State.

First, a word of thanks.

We’ve been overwhelmed by the positive feedback we’ve received over the past two months. It’s been a joy to cover all the bitcoin ETF news and flows and share it with you all. We thank you deeply for the support.

Now, we want to do more.

Why Deep Flow?

We started Flow State because we saw the bitcoin ETFs bringing so many new investors, capital allocators, and people from other walks of life to bitcoin.

We see a need, which is to bridge the gap between bitcoin’s history as a fringe alternative asset, and it’s future as a mainstream institutional investment vehicle.

Bitcoin and ‘TradFi’ are converging. Through this process, we want to cover not only what is happening, but also explain why, and try to anticipate what’s coming next.

Our aim is to make you the smartest investor you can be, the most informed member of your team, and the best possible advisor to your clients.

That’s why in addition to our daily reports, we’re launching Deep Flow as weekly newsletter that goes deep into market trends, BTC flows, regulatory developments, and more.

Membership

The first month of Deep Flow will be free to all existing subscribers.

• Starting Monday June 17th it will move behind a paywall, for paid members only.

• Membership will be $12 per month starting 17 June.

• However, in addition to the free first month, we’re offering a 25% off (price: $9 / month) to early members who join between now and then.

Members will get access to not only the weekly editions of Deep Flow, but also to a private group where we’ll answer your questions about the market, our analysis, and bitcoin generally. Plus, more benefits to come!

If you’d like to join today, just hit the button below.

Now, with all that said, let’s dive in.…🌊🌊🌊

1. Introduction

2. A Word on the Data

3. Top Holders

4. Allocation sizes

5. Holders by Location

6. The Entities

7. Key Observations

Introduction

After four months of trading, the spot bitcoin ETFs hold approximately 840,000 BTC worth $56 billion.

As we know, GBTC distorts the numbers a bit. They’ve had almost uninterrupted outflows since launch (only just turning the tide in the past few days), and have sent out nearly 330,000 BTC.

Grayscale shenanigans aside, the ‘New Nine’ ETFs (ex. GBTC) have accumulated 550k BTC, for inflows of $37 billion.

That’s 2.6% of all BTC that will ever exist. In four months.

So who is responsible for all that buying?

What type of institutions? With what investment strategies? Where are they, and who are their clients?

Actually, first of all - Why do these questions even matter?

Because the bigger picture is that Bitcoin (meaning all of: the asset, the network, and the culture) has begun a radical transformation.

For a long time, a popular bitcoin meme has been that “the institutions are coming!” Well, now they’re here. Wall Street is here. BlackRock is here. The hedge funds are here. The pension funds are coming too.

Bitcoin’s childhood is over.

This new class of investors now shares responsibility for guiding bitcoin through its adolescence. How this sharing of responsibility (and yes, power) goes will determine what kind of adulthood bitcoin has.

Global reserve currency? Digital gold? Money for everyone, everywhere?

Whatever path bitcoin takes will be determined ultimately by who is joining the network, when, and with how much size.

A Word on the Data

Most of the information we have on the current holders of bitcoin ETFs comes from 13F filings, which are disclosures that institutional investment managers make to the SEC pursuant to 13(f) of the Securities Exchange Act of 1934.

What are 13F securities? Lots of things (see question 7 here), but for our purposes here it’s enough to know that the bitcoin ETFs qualify.

Also, let’s talk about Assets Under Management (AUM).

Opinions on the right way to measure AUM are like predictions of the BTC price one month from now: everyone’s got one, and they’re all wrong.

Do you mean assets under management? Under advice? Under administration? Net? Gross? The list goes on.

Where available, we’ve used ‘Regulatory Assets Under Management’ (RAUM), which can be found on a company’s Form ADV.

Why RAUM?

• It measures gross assets, rather than net. Which means it adds long and short positions, even if they cancel each other out. It also includes leveraged amounts, and un-allocated capital.

• It is a standardized measure defined by the SEC. Every filer measures it in the same way.

For leveraged & long/short portfolios like hedge funds, the RAUM can sometimes differ significantly from the AUM reported for non-regulatory purposes.

For example, the case of Millennium Management. They’re a hedge fund and the top overall holder of bitcoin ETFs today.

The AUM they report on their website is $64b, whereas their RAUM is $505b.

Both our representation, therefore, of AUM and also the % allocation that entities have made to bitcoin ETFs this quarter is based on RAUM.

But enough throat clearing! On to the numbers.

Top Holders

The top 10 holders by total allocation are in the table below.

A couple of things should jump out.

First, seven of the top ten are hedge funds. This means we don’t know precisely what their investment strategies are.

However we can say with some confidence that they’re not just speculating on BTC and long only. Their positions will be hedged long/short.

Millennium, Susquehanna, and Jane Street are not hodlers.

For an interactive table, check out Top 21 ETF Hodlers

Removing the hedge funds from the list, and we can see a better picture of the likely long positions.

I want to make special mention of Horizon Kinetics, at the top of the table.

Not only do they have by far the single biggest non-hedge fund allocation at $913m, but at 14% of their AUM it’s one of the biggest proportionate investments too.

What do Horizon (and their clients) believe about bitcoin?

They call themselves “contrarian (fact-based)” investors, “dedicated to the pursuit of independent, creative thought.”

When it comes to bitcoin, Founder and CEO Murray Stahl seems to have backed up the talk with action.

Stahl has been a bitcoiner for some time. In 2018 he had a $100m position, and called it “a major civilizational change in the way human beings are going to organize themselves.”

More recently in late 2022, he wrote an article comparing bitcoin to bonds, and said this:

Allocation sizes

Looking at the allocation sizes as a proportion of firms’ AUM is interesting for at least two reasons.

First, percentage allocation is a proxy for bullishness. The higher the allocation, the more bitcoin appetite one has.

Second, even the proportionately small sizes tell us a story, because it shows how much more room there is to run.

Before we get into the top holders by %, a couple of notes:

The top 10 is somewhat misleading, as there are a very small number of firms with a very large allocation.

Only 60 of the 948 filers have an allocation above 1%.

To give you a sense of how long the tail is, the chart below shows the number of holders at different allocation sizes. Almost half have less than $500k.

In any case, here are the top 10 holders, by allocation %:

CRCM’s $90m is all in IBIT. They’re a fairly incognito firm based in San Francisco, with not much of a public presence as far as we can tell.

CTC is a hedge fund headquartered in Chicago, and their $25m is all in IBIT too.

Holders by Location

Where in the world are all these firms? The short answer is, they’re American.

But there are some overseas firms with decent sized allocations. Here are the top 10:

We haven’t broken them out here, but there’s not much to show for global holdings of the individual ETFs. Apart from Ovata, the top 10 are all in IBIT only.

The Entities

Finally, a word on the 13F filer cohorts.

By number, the largest is the Registered Investment Advisors (RIAs). These include independent advisory firms, wealth management firms and some others.

Investment fund is used as an umbrella term here, for non-hedge fund financial firms (banks, asset managers etc.). Both by count and asset proportion, these account for ~10% of total filers.

Hedge funds are less than 10% by number but account for nearly 60% of the allocated AUM. As discussed earlier, not only are those positions highly unlikely to be significantly net long, but they’re also more than likely quite different already from when their 13Fs were filed.

Key Observations

The ETFs have been an overwhelming success, surpassing even the most optimistic expectations. What do we expect for the rest of 2024?

The floodgates are yet to open!

ETFs have been very popular with advisors, with over 700 RIAs in the 13F filings. These RIAs are independent or ‘hybrid’ firms, not tied to a specific broker-dealer network.

The majority of ‘advised assets’ in the US are managed by wirehouse firms and broker-dealer networks, many of which are still in the process of approving the ETFs on their platforms.

There are 15,114 RIAs in the United States. We’ve seen just a tiny preview of what’s to come.

We are likely to see these approvals come through in the second half of this year, at which point advisers managing over $15 trillion in assets will have access to the ETFs.

Volatility dampening? Not yet.

In the short term, ETFs are unlikely to dampen bitcoin's volatility.

Of the overall $56 billion in ETF assets, more than 80% is held by non-institutional investors (i.e. direct retail). Plus, hedge funds make up over 50% of the institutional assets.

During times of market volatility, retail investors often react emotionally, buying at highs and selling at lows, which further increases volatility.

However, as the proportion of adviser-managed assets grows, we may see a dampening effect. Advisers typically follow target asset allocations. Rebalancing portfolios often involves buying more in falling markets and selling in rising ones, which can help reduce volatility over time.

That’s the Deep Flow for this week.

I’ll see you back here next Monday.

— Julian