Hedge Funds Cut Bitcoin ETF Holdings by 15.6% in Q1 2025 Amid Market Volatility

In the first quarter of 2025, several hedge funds reduced their Bitcoin (BTC) exposure, signaling a potential shift in institutional confidence in the cryptocurrency market. Notably, the state of Wisconsin exited its entire $321 million position in BlackRock iShares Bitcoin ETF (IBIT). This move was part of a broader trend where the average portfolio allocation in IBIT dropped by 15.6% in the past quarter.

Millennium Management LLC significantly reduced its IBIT position by 41% to 17.6 million shares and closed its position in the Invesco Galaxy Bitcoin ETF (BTCO). However, the fund added BTC-related exposure from Ark 21Shares and Grayscale Mini. Another hedge fund, Brevan Howard, reduced its IBIT holdings by 15.6%. These rebalancing actions were not surprising given the market headwinds seen in Q1 2025, including tariff wars and a 12% drop in BTC prices from $109K to $76K.

The cautious approach by hedge funds may be attributed to the reduced basis trade, which involves the price difference (premium) funds get when they buy spot BTC ETF and short CME BTC Futures. This premium collapsed and reached its lowest around the end of March, leading to a reduction in hedge fund holdings. The premium was lucrative, hitting 15%-20% annualized returns in late 2024, but sharply dropped below 4% in March. In Q2 2025, the premium surged to 9% but has slightly eased below 8%.

The demand for spot BTC ETFs also reflected this trend. In February and March, the products saw over $4 billion in outflows. However, in April and the first half of May, they saw $5.2 billion in inflows, lifting BTC above $100K for the first time since February. The current BTC levels reflected a bull mode seen before the November massive run-up, according to the CryptoQuant Bull Score Index reading of 80. More inflows into U.S. spot BTC ETFs could rally BTC higher, but any faltering in demand for the products could lead to a local top for the crypto asset.

In summary, the decline in Bitcoin ETF allocations in Q1 2025 indicates a cautious approach by institutional investors, likely due to market volatility and reduced basis trade premiums. While the trend may be temporary, it highlights the need for investors to monitor market conditions and adjust their strategies accordingly. The renewed demand for spot BTC ETFs in April and May suggests that institutional confidence may be recovering, but the overall sentiment remains cautious.