The era of self-custody for Bitcoin may be coming to an end, as wealthy holders increasingly transfer their assets to regulated exchange-traded funds (ETFs) driven by tax incentives and improvements in institutional infrastructure.
In a post on the X platform on Wednesday, Martin Hiesboeck, the head of blockchain and crypto research at the crypto financial services platform Uphold, stated that the movement of large Bitcoin (BTC) wallets towards ETFs marks the first significant decline in self-custodied BTC in over 15 years.
"This is another nail in the coffin of the original crypto spirit," he wrote, noting that the once defining principle of "not your keys, not your coins" is giving way to a more traditional approach centered on compliance and financial optimization.
"This shift is driven by the convenience and significant tax advantages offered by ETFs, as well as the ability for major investors to manage their wealth through existing financial advisors and access broader investment/borrowing services," Hiesboeck said.
Leading this change is BlackRock's iShares Bitcoin Trust (IBIT), which, according to BlackRock's head of digital assets Robbie Mitchnick, has facilitated over $3 billion in whale Bitcoin conversions.
Mitchnick told Bloomberg that many early adopters now prefer the convenience of managing their holdings through established financial institutions while maintaining exposure to Bitcoin price fluctuations.
Recent rule changes by the U.S. Securities and Exchange Commission (SEC) have accelerated this shift. The adjustment allows spot Bitcoin ETFs to create and redeem "physical" shares, enabling authorized participants to directly exchange Bitcoin for ETF shares without triggering a taxable sale.
The physical structure offers tax advantages. In traditional "cash" ETFs, funds must sell assets to meet redemptions, which triggers capital gains that are passed on to shareholders.
In contrast, physical redemptions allow funds to transfer the Bitcoin itself, thereby avoiding taxable events and protecting investors from collective capital gains burdens, Hiesboeck said.
"The physical mechanism makes the ETF structure more tax-efficient for long-term holders by reducing the need for funds to sell assets, thus preventing the distribution of unwanted capital gains to investors," he wrote.
Related: Bitcoin (BTC) whales quietly embrace BlackRock ETF after SEC rule changes
Original article: “Another nail in the coffin of the original crypto spirit”: Whales abandon self-custody for ETFs due to tax advantages
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