Why Sovereign Wealth Funds Are Buying Bitcoin: Risks and Strategic Considerations

Sovereign wealth funds (SWFs) are quietly building Bitcoin positions during market downturns, viewing dips as buying opportunities despite the asset's notorious volatility. Abu Dhabi's Mubadala Investment Company and Luxembourg's State Fund for Institutional Investors (FSIL) exemplify this cautious approach, accumulating Bitcoin through regulated vehicles like BlackRock's iShares Bitcoin Trust (IBIT) since 2023 according to a Forbes report. FSIL's 2025 move was particularly notable, committing just 1% of its €745 million portfolio to Bitcoin via ETFs, reflecting both strategic interest and operational caution.

This accumulation strategy targets specific price thresholds, with funds like Mubadala and FSIL showing willingness to buy when Bitcoin trades below $90,000. Their allocations remain deliberately small-typically 1-2% of total portfolios-underscoring a hedging rather than speculative intent. Luxembourg's decision also aligns with its broader alternative assets strategy, where crypto now represents up to 15% of holdings as the nation pushes to become a European crypto hub under MiCA regulations.

However, Bitcoin's role as a portfolio diversifier faces challenges. Its correlation with risk assets has strengthened recently, meaning it often falls alongside equities during market stress rather than acting as a traditional safe haven. This was starkly evident when Bitcoin plunged to a seven-month low below $90,000, triggering a $523 million outflow from BlackRock's IBIT-a record single-day selloff. Such volatility complicates SWF strategies, as seen in the shift toward gold by risk-averse investors after Bitcoin's peak in October.

Further complicating the thesis, institutional "bit-treasuries" that drove $50 billion in purchases over the past year now trade at discounts to net asset value, signaling weakened near-term buying momentum. While SWFs view dips as entry points, their limited allocations-capped at 1-2%-reflect a recognition that Bitcoin remains a high-risk, high-reward asset. U.S. regulatory caution, including the Federal Reserve's skepticism over tokenization adoption, adds another layer of uncertainty. For now, SWF accumulation reveals institutional confidence in Bitcoin's long-term potential but highlights the asset's still-fractured relationship with traditional risk management.

BlackRock's Enabling Role and Volatility Exposure

BlackRock has emerged as a key facilitator for institutional adoption of Bitcoin through its iShares Bitcoin Trust (IBIT), which became its top revenue driver in 2024 after spot Bitcoin ETFs launched. By September 2025, IBIT managed $104 billion in digital assets-growing faster than any traditional fund- leveraging BlackRock's reputation and distribution network to attract regulated Bitcoin exposure. This positions Bitcoin as a mainstream asset class within global portfolios, though the product's performance remains sensitive to market swings.

The volatility exposure proved stark when a $523 million institutional outflow occurred from IBIT in a single day-the largest since its 2024 debut-as Bitcoin prices dropped to a seven-month low below $90,000 according to Reuters. This selloff reflected broader profit-taking after Bitcoin's October peak, reduced institutional purchases by treasury firms, and a shift toward gold. Bitcoin treasury companies-responsible for $50 billion in annual buys-now trade at net asset value discounts, undermining near-term momentum.

Operational risks are mitigated by custody partnerships like Coinbase Prime, which handles security and compliance for IBIT. However, regulatory fragmentation remains a challenge, with custody solutions varying across jurisdictions. While BlackRock's scale reduces friction for investors, residual risks persist: custody providers face evolving regulatory scrutiny, and institutional adoption could stall if regulatory clarity lags.

For investors, IBIT exemplifies how institutional products lower entry barriers but inherit Bitcoin's extreme volatility. The $523 million outflow underscores that even curated access doesn't eliminate market swings, demanding caution despite BlackRock's risk-mitigation advantages.

Regulatory Barriers and Strategic Caution

Sovereign wealth funds eyeing Bitcoin face significant hurdles beyond investor enthusiasm. U.S. regulatory uncertainty stands as the primary roadblock to broader adoption. Current policy gaps create fragmentation, making long-term sovereign investment highly problematic. As one assessment notes, Bitcoin's inherent volatility and speculative character render it fundamentally incompatible with reserve management strategies, unlike more stable assets. This regulatory ambiguity alone negates potential blockchain efficiency gains, amplifying systemic risks for national portfolios.

Bitcoin's price swings starkly contrast with traditional safe havens like gold or government bonds. While gold typically sees single-digit monthly volatility, Bitcoin routinely experiences double-digit swings, complicating its role as a stable store of value or crisis hedge. This extreme fluctuation makes precise liability matching nearly impossible for SWFs, which prioritize capital preservation over speculative upside. The asset's design as a scarce digital commodity doesn't solve the fundamental accounting and risk management challenges for state entities.

SWF allocations remain strictly capped, reflecting this caution. Evidence shows only minor allocations, generally 1-2% of portfolios, to Bitcoin or related instruments. Concrete examples demonstrate measured engagement: the Wisconsin State Investment Board invested $321 million, while Abu Dhabi's Mubadala allocated $436.9 million in the same period. These represent targeted experiments, not strategic shifts. Previous indirect exposure, like Bhutan's $1 billion Bitcoin holding, involved direct cryptocurrency rather than regulated instruments and remains an outlier.

Geopolitical tensions do boost Bitcoin's appeal as a perceived hedge against systemic risk and currency debasement. However, operational risks persist. Custody solutions for massive sovereign holdings remain unproven, and the decentralized nature of Bitcoin complicates compliance with anti-money laundering rules across jurisdictions. Without clear, stable U.S. regulatory frameworks governing custody, taxation, and reporting, large-scale sovereign adoption remains impractical. The U.S. sovereign fund plan post-2025 still grapples with operational delays partly due to these unresolved policy questions.