In this week’s edition, Miguel Kudry from L1 Advisors explores the contrasting paths of direct cryptocurrency ownership versus exchange-traded funds (ETFs) and their anticipated evolution through 2025. Additionally, Crews Enochs from Index Coop addresses key questions in our “Ask an Expert” segment.
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The Blurring Lines Between Direct Crypto Ownership and ETFs
The year 2024 marked a watershed moment for the cryptocurrency landscape with the introduction of bitcoin and ether spot exchange-traded funds (ETFs), quickly establishing themselves as some of the fastest-growing ETFs ever. By November 2024, global crypto exchange-traded products (ETPs) had amassed over $134 billion in assets under management (AUM). This remarkable growth occurred against the backdrop of initial restrictions on cash-only redemptions and contributions in the U.S., a limitation set by the SEC during the approval process. However, the coming year, 2025, is expected to bring transformative changes to this financial ecosystem.
The Shift to In-Kind Redemptions
In 2024, the SEC’s ruling against in-kind redemptions meant that only cash transactions were permitted for ETF shares, which constrained the potential of these financial products. This landscape is on the cusp of a significant shift in 2025, with growing expectations that regulatory authorities will allow in-kind transactions for spot crypto ETFs. BlackRock has already initiated a rule change to facilitate in-kind redemptions for its Bitcoin ETF. This shift will enable authorized participants to issue and redeem shares directly with Bitcoin or ether, rather than cash, fostering a new liquidity dynamic between traditional finance (TradFi) and decentralized finance (DeFi).
Implications for Investors
Previously, the cash-only redemption model sidelined billions in cryptocurrency assets. Crypto-native investors, particularly those with low-basis assets, were reluctant to convert their holdings into ETFs due to potential tax liabilities. The advent of in-kind redemptions will empower these investors to transition portions of their crypto wealth into ETFs without incurring immediate tax burdens, enabling access to a wider array of traditional financial services such as uncollateralized lending, mortgages, and private banking.
For traditional investors who gained exposure to cryptocurrencies through ETFs, the shift to in-kind redemptions offers an opportunity to engage more deeply with the crypto ecosystem. After witnessing significant appreciation in their ETF holdings (for instance, bitcoin was valued at around $46,800 at the ETF launch in January 2024, and ether at approximately $3,422 by mid-July 2024), these investors can now convert ETF shares into direct cryptocurrency holdings, exploring DeFi products without the need for additional capital or tax implications.
Catalysts for Industry Evolution
Another critical development comes with the withdrawal of Staff Accounting Bulletin No. 21 (SAB-21), which will relieve financial institutions from listing digital assets as liabilities on their balance sheets. This regulatory change is expected to encourage more banks and brokerages to engage with crypto custody and develop crypto-native financial products. A notable example is Coinbase’s recent launch of a bitcoin-backed lending product in collaboration with Morpho Labs, utilizing DeFi mechanisms to back loans with Bitcoin. As we progress through this year, we can anticipate a surge of traditional financial institutions following suit.
At the same time, a growing segment of investors is gravitating towards self-custody, opting to manage their assets independently to access crypto-native products without relying on intermediaries. This trend highlights the increasing importance of user-friendly and secure self-custody solutions in the rapidly evolving crypto landscape.
The Convergence of TradFi and DeFi
As we look ahead to 2025, the distinction between traditional and decentralized finance is expected to become increasingly blurred. With mechanisms such as in-kind transactions and favorable regulatory changes on the horizon, investors will likely engage with crypto-native platforms more seamlessly and intuitively. This convergence is anticipated to drive inflows into both sectors, enhancing trading volumes and creating a more interconnected and liquid market.
In summary, the transition from ETFs to direct ownership in the crypto space transcends mere investment options; it reflects a broader shift in investor behavior and market dynamics. With the prospect of in-kind redemptions and regulatory advancements like the withdrawal of SAB-21, 2025 is poised to be a pivotal year in integrating cryptocurrencies into mainstream finance, further erasing the lines between traditional and on-chain financial infrastructures.
– Miguel Kudry, CEO, L1 Advisors
Ask an Expert
Q. What distinguishes on-chain crypto ownership from traditional ETFs?
A. Beyond 24/7 market access, on-chain ownership offers true composability—enabling investors to utilize assets as collateral, earn yield, and participate in decentralized ecosystems. While ETFs provide exposure, on-chain assets deliver unparalleled flexibility and utility.
Q. How does direct custody of crypto assets enhance investor flexibility compared to ETFs?
A. Consider the hassle of transferring assets from one brokerage to another. With on-chain crypto ownership, you gain complete control over your assets. You can self-custody, deposit with custodians, and move assets quickly. If an opportunity arises, immediate liquidity is available—no delays, just swift action.
Q. Will future AI agents favor ETFs or tokenized assets on-chain?
A. Envision an AI agent managing investments. To buy an ETF, it must navigate KYC processes, adhere to brokerage hours, and rely on human intermediaries. In contrast, tokenized assets on-chain remove these barriers, offering continuous access, seamless automation, and the composability necessary for efficiency. For AI-driven financial systems, the choice is clear: DeFi.
– Crews Enochs, Ecosystem Growth Lead, Index Coop
Keep Reading
– President Donald Trump has signed a crypto order aimed at establishing a federal framework to foster a positive environment for U.S. digital asset businesses.
– The Arizona Bitcoin Strategic Reserve Bill has progressed after receiving approval from the Senate Finance Committee.
– A new U.S. Senate Subcommittee on Digital Assets has been formed, chaired by Wyoming Senator Cynthia Lummis, who is a prominent advocate for cryptocurrency in Congress.
