Sophia’s Thoughts On The Recent 13F Filings
As U.S. spot bitcoin ETFs navigate a turbulent market, what can the recent institutional shifts and quarterly 13F filings reveal about the future landscape of cryptocurrency investment?
These are Sophia's Thoughts:
With the current earnings season in full swing, several US investment management firms have disclosed in their 13F filings that they have allocated some capital to spot Bitcoin ETFs.
Key examples include Fidelity's “All in One” ETFs and the State of Wisconsin Investment Board.
This comes at a time when the recently approved US spot bitcoin ETFs are having a bumpy ride. Inflows were slow after listing, then picked up amidst the halving, and have now cooled off again.
Our analysis of the crypto market in the context of modern portfolio theory showcases that there is still significant upside for crypto because it offers important diversification benefits for traditional investors. Institutions appear to be racing to capture these benefits for their investor bases.
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🚀 Last week’s market performance
Last week, the crypto market lost 1.6% while Bitcoin (BTC) lost 0.6%. LivePeer (LPT), the live video screening network, led the market gaining 16.8% this week upon news of their Web3 social media platform. The worst performing coin of the week was Pendle (PENDLE), a protocol that enables the tokenization and trading of future yield, which lost 21.1%.
🧐 What is your crypto mood today?
In each Sophia's Thoughts newsletter, we ask about your crypto mood. Your response to this question helps Sophia get a better sense of the pulse of crypto markets. And this ultimately translates into better insights for you when combined with Sophia's AI models. Your data empowers Sophia to provide you with even better intelligence going forward!
🎢 The Spot ETF Rollercoaster
Since their launch in January 2024, US spot bitcoin ETFs have navigated a volatile landscape of fluctuating inflows and macro economic conditions. Initially, these ETFs captured significant interest and accumulated USD 1.05 billion in net inflows at their peak in March. This helped fuel a record high Bitcoin price of near USD 74,000.
However, as excitement around the ETFs began to wane and the halving conversation took over, Bitcoin’s price plummeted. This triggered over a billion dollars of outflows from the ETFs. Nonetheless, after multiple weeks of sell-offs, the momentum has turned around and the ETFs are experiencing a resurgence. Last week on May 6, there was USD 217 million in net inflows, with a majority going into Fidelity (FBTC) and Ark Invest (ARKB).
📊 Quarterly Company Announcements
As the earning season is unfolding, we have seen a shift as traditional financial institutions who were historically reserved about cryptocurrency began disclosing their investments in Bitcoin through various ETFs. One of the most outspoken executives is JP Morgan’s CEO Jamie Diamond. Diamond has publicly stated that “I will personally never buy Bitcoin and I do think it’s a risk if you are a buyer.” However, it came to light in JP Morgan’s 13F filings that the company has allocated funds across multiple ETFs including BlackRock’s IBIT and Fidelity’s FBTC. Wells Fargo reported a modest investment in Grayscale’s GBTC. Other significant banks like BNP Paribas and BNY Mellon have also entered the ETF market. So far, more than 760 investment management firms declared allocations to Bitcoin in their 13F filings this quarter. That's more than double the number from each of the last two quarters.
As additional evidence of the institutional adoption trend, Fidelity Investments Canada has integrated Bitcoin into its ETFs. They have a 1-3% Bitcoin allocation in their "All-in-One" funds in Canada through spot bitcoin ETFs.
Another example is that the State of Wisconsin Investment Board disclosed substantial holdings in cryptocurrency investments. The board's portfolio features $99.2 million invested in BlackRock's iShares Bitcoin Trust (IBIT) and $63.7 million in Grayscale's Bitcoin Trust (GBTC). Furthermore, the board has diversified its crypto-related investments by including stocks from leading blockchain and mining companies such as Coinbase, Marathon Digital, Riot Platforms, Block, Cipher Mining, Cleanspark, and MicroStrategy.
The State of Wisconsin Investment Board's addition of cryptocurrencies to its portfolio may mark the beginning of additional public funds and traditional financial institutions allocating towards digital assets. Eric Balchunas, a Bloomberg ETF analyst, noted that the early significant investment in IBIT by a major state entity is unprecedented and highlights the ETF's strong appeal.
🧺 Crypto as a diversification tool
The adoption of crypto by investment management firms suggests a broader acceptance and understanding of cryptocurrency's role in modern portfolio theory. The theory, which goes back to Harry Markowitz in the 1950's, advocates for the inclusion of a variety of asset classes in investors' portfolios. Diversification plays a key role in this regard. An investor that is trying to maximize the amount of return they can generate per unit of volatility they take on will do best by optimally diversifying across asset classes.
We analyzed the data to understand how much a well-diversified investor could gain by including Bitcoin in their portfolio. Consider an investor that holds a traditional 60-40 portfolio: 60% is invested in a broad equities index (like the SPDR S&P 500 ETF) and 40% is invested in fixed income securities (like the Vanguard Total Bond Market ETF). Over the last year, this investor could have earned 27.5% in returns with a volatility of 9.8%. This would have granted the investor a Sharpe Ratio (i.e., the ratio of risk-adjusted returns over volatility) of 2.3. This is a substantial Sharpe Ratio as a traditional 60-40 portfolio generally enjoys a Sharpe Ratio of around 0.6 per year.
But the investor could have done even better had they invested in crypto as well. If the investor had decreased their holding of the 60-40 portfolio by 10% and invested this amount in Bitcoin, the investor could have enjoyed a Sharpe Ratio of 2.57. That's a 12% increase compared to the no-crypto portfolio. Even a portfolio that holds a modest allocation of just a few percentage points in Bitcoin would have fared well. Similar Sharpe Ratios could have been achieved with an allocation of only 5% to crypto. That's because of one key feature: Bitcoin has low correlation with traditional asset classes. The correlation between Bitcoin and US equities in the last year was 31%, while it was only 5% between Bitcoin and US bonds. The low correlations enable large diversification benefits for traditional investors.
If we view crypto as a tool to achieve diversification, then an allocation of somewhere between 5 and 10% to crypto appears to offer significant benefits for traditional investors. Assuming that the global market portfolio is worth USD 164.5 trillion (State Street Global Advisors estimate in June 2023), modern portfolio theory would suggest a total market cap for the crypto market of at least USD 8.2 trillion. Currently, we are at USD 2.25 trillion, suggesting that a big upside is still possible for the crypto market.
The adoption of crypto by investment management companies suggests that institutions are slowly accepting that crypto has some sort of intrinsic value. Many may not believe that some coins have much utility. But the diversification benefits are real and available for investors to realize now.
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