Bitcoin’s self-custody era may be coming to an end as wealthy holders increasingly transfer their assets into regulated exchange-traded funds (ETFs) amid tax incentives and improving institutional infrastructure.
In a recent post on X, Martin Hiesboeck, head of blockchain and crypto research at crypto financial services platform Uphold, stated that the movement of large Bitcoin (BTC) wallets into ETFs marks the first significant decline in self-custodied BTC in over 15 years.
“Another nail in the coffin of the original crypto spirit,” he wrote, noting that the “not your keys, not your coins” ethos that once defined the asset is giving way to a more traditional approach centered on compliance and financial optimization.
“The shift is driven by the convenience and significant tax benefits offered by ETFs, as well as the ability for major investors to manage their wealth through existing financial advisers and access broader investment/lending services,” Hiesboeck explained.
BlackRock’s Bitcoin ETF Facilitates Billions in Whale Conversions
Leading this transition is BlackRock’s iShares Bitcoin Trust (IBIT), which has already facilitated over $3 billion worth of Bitcoin conversions from whales, according to Robbie Mitchnick, BlackRock’s head of digital assets.
Mitchnick informed Bloomberg that many early adopters now prefer the convenience of managing their holdings through established financial institutions while still retaining exposure to Bitcoin’s price movements.
A recent U.S. Securities and Exchange Commission (SEC) rule change has accelerated this transition. The adjustment permits “in-kind” creations and redemptions in spot Bitcoin ETFs, allowing authorized participants to exchange Bitcoin directly for ETF shares without necessitating a taxable sale.
Tax Advantages for Large Traders
The in-kind structure offers a significant tax advantage. In a traditional “cash” ETF, funds are required to sell assets to fulfill redemption requests, which triggers capital gains that are subsequently passed on to shareholders.
Conversely, in-kind redemptions enable funds to transfer Bitcoin itself, thereby circumventing the taxable event and shielding investors from collective capital gains burdens, Hiesboeck elaborated.
“The in-kind mechanism makes the ETF structure more tax-efficient for long-term holders by reducing the need for the fund to sell assets, thereby preventing the unwelcome distribution of capital gains to investors,” he stated.