What are the risks of holding Bitcoin compared to traditional stocks?
Bitwise CIO: No Forced Bitcoin Sales Even if Stocks Plunge
As cross-asset volatility returns, crypto investors are asking a key question: could spot Bitcoin ETFs be forced to sell BTC during an equity market crash? Bitwise CIO Matt Hougan has emphasized that the firm’s spot Bitcoin ETF structure is designed to avoid forced sales triggered by stock market drawdowns. For web3 builders and crypto-native traders alike, understanding why matters for assessing liquidity, price dynamics, and institutional adoption.
Why Bitwise Says There’s No “Forced Selling” Trigger
Bitwise’s spot Bitcoin ETF (ticker: BITB in the U.S.) is built to hold unencumbered spot BTC on a 1:1 basis. That structure eliminates common triggers that cause indiscriminate liquidations in traditional markets.
- No leverage: The fund doesn’t borrow against its Bitcoin, so there are no margin calls.
- No derivatives overlay: There’s no futures basis trade or options hedging that could require collateral top-ups in a crash.
- No securities lending: The Bitcoin isn’t lent out or rehypothecated, reducing counterparty risk.
- Grantor trust structure: Like other U.S. spot BTC ETFs, BITB is a 1933 Act commodity-style trust holding spot BTC, not a 1940 Act fund with complex collateral rules.
What about creations and redemptions? In the U.S., spot Bitcoin ETFs use authorized participants (APs) to create or redeem shares. Depending on regulatory approvals, funds can support cash, in-kind, or hybrid processes. Either way, equity market declines do not mechanically force the ETF to sell Bitcoin. Sales occur only if there are net redemptions that require cash settlement-i.e., investor-driven flows, not stock volatility per se.
Custody, Transparency, and Liquidity Design
Bitwise leans on institutional-grade custody and transparency practices that are built for stress scenarios:
- Cold storage custody: Bitcoin is held with an institutional custodian (Coinbase Custody Trust Company), segregated and stored offline.
- Independent oversight: Coinbase Custody is a New York DFS-regulated trust company with standard SOC auditing frameworks.
- On-chain transparency: Bitwise publicly shared on-chain addresses for its ETF holdings, allowing anyone to verify balances in real time-an industry-first when launched.
- Multiple liquidity rails: APs can source BTC across OTC desks, exchanges, and from inventory, helping maintain robust primary-market liquidity.
These choices mean that if equities fall sharply, BITB’s Bitcoin is not tapped as collateral, not lent, and not encumbered by derivative margin requirements. The only driver of sales is investor redemptions.
What Happens to BITB If Stocks Crash? Scenario Guide
| Scenario | ETF Flow Dynamics | Does the Fund Need to Sell BTC? | Why |
|---|---|---|---|
| Equities drop 10% in a day | APs arbitrage ETF vs. NAV if spreads widen | No, not from equities alone | No leverage or cross-collateral link to stocks |
| Bitcoin falls 15% intraday | Possible outflows; depends on investor behavior | Only if net redemptions require cash | Redemptions, not price, trigger sales |
| Large investor redeems ETF shares | Primary-market redemption | Maybe | Cash redemptions can require selling BTC; in-kind deliver BTC |
| Exchange outages or spreads widen | APs route via OTC/liquidity providers | Not inherently | Multiple liquidity venues mitigate forced actions |
Risks That Can Still Pressure Bitcoin Prices
“No forced selling” at the ETF level doesn’t mean Bitcoin is insulated from macro stress. Crypto-native and macro channels can still drive downside:
- Risk-off correlations: In severe liquidity squeezes, investors de-risk across all assets, including BTC.
- Derivatives liquidations: Perpetual swap markets can cascade through auto-deleveraging and liquidations.
- Miner supply: Post-halving economics and energy shocks can influence miner sell pressure.
- Fund flows: Sustained net outflows from any large spot vehicle (e.g., trust conversions or tax-driven selling) can pressure price-even if not “forced.”
- Network congestion: Fee spikes can temporarily impede on-chain arbitrage and settlement efficiency.
The key distinction: these are market forces, not a structural requirement for Bitwise’s ETF to liquidate Bitcoin because equities fell.
Why This Matters for Crypto, Blockchain, and Web3
Spot Bitcoin ETFs have become a major on-ramp for institutions and advisors, accumulating tens of billions in assets since launch. Their design choices influence market microstructure across the crypto stack.
- Institutional confidence: Unlevered, transparent holdings lower counterparty and contagion fears.
- Better price discovery: AP arbitrage keeps ETF prices close to NAV, improving market efficiency.
- On-chain verification: Publishing addresses bridges TradFi and on-chain transparency-a web3-aligned practice.
- Portfolio construction: CIOs can hold BTC exposure without introducing forced-sale mechanics common in leveraged funds.
Investor Checklist
- Confirm your ETF’s creation/redemption methods (cash, in-kind, hybrid) and custody policies.
- Assess liquidity across primary and secondary markets-spreads, volume, and AP participation.
- Understand that redemptions, not equity drawdowns, drive any ETF-level selling.
- Complement ETF exposure with self-custody or multi-venue strategies if you need on-chain utility.
Conclusion
Bitwise’s CIO has made the core point clear: the firm’s spot Bitcoin ETF is not wired with the leverage, derivatives, or collateral dependencies that trigger forced liquidations when stocks plunge. While BTC can still move with broad risk sentiment, the ETF’s unencumbered, cold-stored Bitcoin and transparent operations mean equity market turmoil does not mechanically cause Bitwise to sell. For crypto-native participants and institutional allocators, that’s a structural upgrade-supporting deeper liquidity, cleaner price discovery, and a more resilient bridge between TradFi and the web3 economy.
