Can Bitcoin ETFs replace bonds in institutional portfolios?

The rise of Bitcoin ETFs

Bitcoin ETFs are investment vehicles that allow institutional and retail investors to gain exposure to Bitcoin without directly owning or managing the cryptocurrency.

Since the US Securities and Exchange Commission approved spot Bitcoin ETFs in January 2024, the market has grown substantially. 

• By Q4 2024, institutional holdings in US Bitcoin ETFs surged to $27.4 billion, a 114% increase from the previous quarter. This rapid adoption showcases the growing institutional interest in cryptocurrency exposure.
• Major players like BlackRock, Fidelity, VanEck, ARK Invest and Grayscale now manage Bitcoin ETFs. BlackRock’s iShares Bitcoin Trust (IBIT) and Fidelity’s Wise Origin Bitcoin Fund (FBTC) are among the well-known offerings. 
• Institutional adoption of Bitcoin ETFs is accelerating. Registered investment advisers (RIAs) have become top holders of spot Bitcoin ETFs, reflecting growing confidence in the asset class. In June 2025, investment advisers held over $10.3 billion in spot Bitcoin ETFs, nearly half of total institutional assets.
• Family offices and wealth managers are also exploring crypto investments. A 2024 BNY Mellon report indicates that 39% of single-family offices are actively investing or considering crypto investments, driven by client demand and strategic analysis.

ETFs have made it easier for institutions to enter the Bitcoin market while satisfying regulatory compliance and internal risk frameworks. BlackRock recommends a portfolio allocation of up to 1-2% in Bitcoin, citing its potential for diversification and return enhancement.

Bitcoin vs bonds: Risk and return

The trade-off between risk and return is central when comparing Bitcoin ETFs to bonds.

Bitcoin’s historical performance has been characterized by high volatility and substantial returns. Let’s see how:

• In 2024, Bitcoin returned 114%, outperforming major asset classes. However, its annualized volatility is about 50%, significantly higher than bonds and equities.
• Traditional bonds offer stability and predictable income. For instance, as of mid-2025, the iShares 20 Year Treasury Bond ETF (TLT) offered a thirty-day yield of approximately 4.55%, while the Vanguard Total Bond Market ETF (BND) offered a thirty-day yield of around 3.8%. These ETFs provide exposure to long-duration Treasurys and a broad mix of investment-grade bonds, respectively, appealing options for income-focused portfolios during periods of elevated interest rates and market volatility.

Interestingly, the classic 60/40 portfolio, long considered a benchmark for institutional and retirement portfolios, allocates 60% to equities and 40% to bonds. However, prolonged periods of low bond yields and inflationary pressures have prompted calls for rethinking this model. 

In 2022 and 2023, traditional bond portfolios suffered negative returns due to rising interest rates, whereas Bitcoin saw a resurgence in value. This asymmetry has prompted institutions to reassess the risk-reward calculus of allocating to bonds alone. 

Bitcoin ETFs are increasingly being evaluated as potential alternatives for the fixed income portion of such portfolios. In 2025 alone, US spot Bitcoin ETFs had attracted over $40.6?billion in net inflows through early February, a 175% year-over-year increase compared to the same period in 2024. 

Meanwhile, May 2025 saw a record $6.35?billion net inflows into BlackRock’s IBIT, its largest-ever monthly haul. These figures highlight the growing momentum behind Bitcoin as a credible complement.

Did you know? A 2024 study by ARK Invest and 21Shares found that adding a 5% allocation to Bitcoin in a traditional 60/40 portfolio could increase annualized returns by over 3%, albeit with a rise in volatility.

ETF strategies for retirement and pension funds

Retirement and pension portfolios typically prioritize capital preservation, steady income and inflation hedging.

Traditionally fulfilled by bonds and stable assets, these portfolio goals are being challenged by prolonged low yields and rising inflation. As a result, some forward-thinking institutional investors have begun exploring small, controlled Bitcoin ETF allocations to enhance risk-adjusted returns while adhering to their conservative mandates.

Examples of such pension funds include:

• Wisconsin State Investment Board (SWIB): SWIB disclosed an initial $163 million investment in Q1?2024 ($99 million in IBIT and $64 million in GBT). By the end of 2024, it had expanded its IBIT position to ~$321 million across 6 million shares. 
• Michigan State Investment Board: Michigan joined the Bitcoin ETF trend by becoming a notable holder of the ARK 21Shares Bitcoin ETF (ARKB), with an allocation of around $7 million. Though relatively small, the investment reflects a cautious but clear move toward gaining Bitcoin exposure through regulated financial instruments that fit within the compliance parameters of large-scale public funds.
• Houston Firefighters’ Relief and Retirement Fund: One of the earliest public pension funds to experiment with crypto, the Houston Firefighters’ Relief and Retirement Fund allocated a portion of its portfolio to Bitcoin via New York Digital Investment Group (NYDIG), even before ETF approvals. The move, while modest, signaled early recognition of Bitcoin’s asymmetric return potential and its relevance in modern portfolio theory, particularly for funds managing long-duration obligations.

Did you know? On June 16, 2025, the ARK 21Shares Bitcoin ETF (ARKB) executed a 3-for-1 share split, aiming to improve accessibility and liquidity without altering its investment strategy or net asset value. This metonymic move reflects growing investor demand, and Bitcoin’s surge past $100,000 bolstered the split’s rationale.

Tokenized bonds and crypto-backed fixed income

These are alternatives to Bitcoin ETFs that are gaining institutional attention, such as tokenized fixed income. 

These are traditional bonds and money market assets issued as digital tokens on blockchains. This innovation blends institutional-grade assets with blockchain efficiencies such as automated settlement, transparency and programmability.

• BlackRock’s BUIDL fund: Launched in March 2024, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL) tokenizes US Treasurys, cash and repo agreements on blockchain platforms like Ethereum, and later Solana. Within six weeks, the tokenized fund amassed ~$375?million AUM, quickly surpassing Franklin Templeton’s offering, and grew to over $1.7 billion spread across seven blockchains as of March 2025. Unique features include 24/7 trades and tokenized dividend distributions. 
• Franklin Templeton’s OnChain US Government Money Fund (FOBXX/BENJI): Introduced in 2021 using Stellar, and expanded to Ethereum, Avalanche, Base, Aptos and Solana, FOBXX tokenizes US government securities, cash and repos under UCITS regulations. With more than $594?million AUM by February 2025 and a ~4.5% yield, it exemplifies the first regulated, tokenized money market fund in Europe.
• Crypto?backed yield products: Many platforms are experimenting with crypto?backed bonds (e.g., Maple Finance, Open Eden), decentralized debt instruments collateralized by digital assets. While still in early stages, their goal is to offer yields on over?collateralized loans using blockchain-native collateral, previewing a future where digital asset borrowing underwrites fixed-income-like returns.

Challenges and considerations while incorporating Bitcoin ETFs in financial portfolios

Bitcoin ETFs come with their own risks, and one must do their own research, as none of this comprises financial advice. 

Bitcoin ETFs’ challenges for institutions include:

• Volatility: Bitcoin’s price fluctuations can be significant, posing risks for conservative investors.
• Regulatory uncertainty: The evolving regulatory landscape can impact the performance and availability of crypto-related investment products.
• Lack of yield: Unlike bonds, Bitcoin ETFs do not provide regular income, which may deter income-focused investors.
• Operational risks: Risks related to custody, accounting standards and ESG concerns can hinder adoption by large institutions. Bitcoin’s energy consumption, for example, remains a sticking point for some ESG-compliant portfolios.

Bitcoin ETFs offer a compelling opportunity for institutional investors seeking diversification and growth. While they may not fully replace bonds in portfolios, they can complement traditional assets, especially in a low-yield or inflationary environment.

A balanced approach, incorporating a modest allocation to Bitcoin ETFs, can enhance portfolio performance while managing risk. As the financial landscape evolves, institutions must remain agile, adapting their strategies to include emerging asset classes like Bitcoin.