Why self-custody Bitcoin whales are moving Billions into BlackRock's ETF
Incentives > ideals. The Controllers don’t need to win the argument; they need to set the defaults. In-kind transfers, collateral utility, and governance convenience are the decisive defaults.
In July 2025, the SEC approved a rule change that allows tax-free, in-kind transfers of self-custody Bitcoin to exchange-traded funds (ETFs).
With this change, large Bitcoin holders can exchange their coins for ETF shares without incurring tax liabilities.
Bloomberg reported that over $3 billion worth of Bitcoin has been converted into BlackRock ETF shares through in-kind transfers.
Bitwise and Galaxy are also seeing the same trend. Bitwise Asset Management says it’s now receiving daily inquiries about these ETF conversions.
Teddy Fusaro, Bitwise’s president explained that they completed their first in-kind deal with the BITB ETF back in August.
Of course, for many Bitcoin whales this isn’t all or nothing. Most don’t exchange the entirety of their holdings for ETF shares.
Let’s explore why large self-custody holders migrate into paper BTC and why the paperization ratio will keep rising.
1) The big carrots (why Bitcoin whales say “yes”)
A. Tax-free, in-kind transfers
Once you let people convert spot coins into ETF shares without a taxable event, you remove the #1 blocker. Now they can de-risk operationally without booking gains.
B. Collateral utility that self-custody can’t match
ETF shares slot directly into prime broker margin frameworks, ISDAs/CSAs, and bank credit policies.
You can pledge IBIT/FBTC to raise USD, lever other trades, or satisfy family office credit lines. Self-custody coins generally don’t count inside big-bank collateral boxes.
C. Balance-sheet optics & policy comfort
Boards, auditors, insurers, and private bankers prefer registered, CUSIP’d instruments with a daily NAV, transfer-agent records, and familiar statements.
That unlocks bigger lines (loans, derivatives, repo-like financing) at lower spreads than “cold wallet + a promise”.
D. Estate, trust, and governance plumbing
ETF shares drop straight into trust docs, family partnerships, and estate workflows (beneficiary designations, Transfer on Death <TOD>).
No key-management drama, no multi-sig inheritance fire drills, no executors learning seed phrase opsec.
E. Frictionless basis trades
Whales can park coins into ETF, then run covered call or cash-secured put programs around the wrapper.
In self-custody, options access is fragmented; in ETF form, every Prime Broker will quote you.
F. Insurance & compliance arbitrage
Institutional policies cover ETF positions far more easily than “we insure your seed phrases”.
AML/OFAC representations are handled by the fund’s compliance; your risk/compliance committee sleeps at night.
G. Convenience compounding
A CUSIP lives inside portfolio management systems, risk engines, and performance composites. Rebalancing, borrow, lend, tax-lot accounting — one click.
Self-custody introduces system boundaries (wallets, on-ramps, bespoke custodians), which investment teams experience as work.
2) The subtle sticks (why staying sovereign gets harder)
H. Perimeter governance (no new laws needed)
Banks tighten Acceptable Use Policies (AUPs) for incoming/outgoing wallet flows → higher fees, slower wires, enhanced-due-diligence purgatory.
App stores push non-KYC wallets down the distribution stack; clouds update AUPs around node/relay usage.
Exchanges enforce stricter Travel-Rule proofs; OTC desks push clients to custodial rails “for compliance.”
I. Pricing frictions on sovereignty
Higher spreads/fees for off-exchange OTC when settlement is to/from cold wallets.
Lenders haircut self-custody collateral heavily or refuse it; ETF shares get standard haircuts.
J. Legal overhangs and headline risk
Whales with public profiles prefer a “clean” instrument to avoid narratives that their addresses touched sanctioned flows.
Insurers and directors & officers coverage begin to exclude losses tied to key compromise or sanction-tainted UTXOs.
K. Regulatory ambiguity as pressure
Periodic hints (hearings, draft guidance) that node runners / non-custodial services face new obligations.
Not a ban — just ambiguity that raises the expected cost of staying sovereign.
3) The metagame: how the Controllers shape revealed preference
Make the ETF the default. Default custody at private banks becomes the ETF; wires to spot exchanges trip extra checks.
Reward paper exposure with utility. ETF shares get access to credit, derivatives, and portfolio tools; sovereign coins get nothing equivalent.
Normalize with status. Index inclusion, celebrity allocators, wealth-platform “model portfolios” featuring ETF sleeves.
Engineer comfort, not compulsion. Whales publicly preach “security & compliance best practice” while quietly admitting the operational relief.
4) Why treasury companies are next (and why paperization goes up)
Corporate treasurers want carry + collateral without governance risk.
Accounting and risk committees will prefer ETF/ticketed custody over keys.
Banks will bundle credit + hedging + ETF placement → a flywheel of institutional paper ownership.
Result: rising paperization ratio → damped realized vol, clean borrow, easier options markets; deeper integration into TradFi pipes.
I’ve covered the topic more extensively in a separate article: Why Bitcoin Treasury Companies will be forced to buy ETFs instead of Spot Bitcoin
5) Second-order effects (what this does to the market)
Volatility corridors tighten. With more coins inside vehicles that can be gated, margined, or hedged, upside blow-offs get sold via options/alpha capture; downside gets backstopped when spreads get too wide.
Cheaper surveillance, easier throttles. You don’t need a ban if 60–70% of float sits in wrappers that can change lending terms, halt creations, or hike fees during “emergencies.”
Narrative smoothing. Paper exposure lets allocators “own BTC” without touching the parts that threaten CBDC/stablecoin Medium-of-Exchange plans.
6) Concrete incentives menu (what you’ll actually see offered)
In-kind transfer holidays (fee-free conversions, white-glove ops teams to onboard whales).
Credit sweeteners (lower margins, higher loan-to-value ratios, term sheets that only accept ETF collateral).
Tax-lot optimization inside the wrapper (Highest In - First Out/Lowest In - First Out strategies packaged by the fund complex).
Structured yield overlays (covered-call share classes, dividend-like distributions).
Estate packages (embedded Transfer on Death <TOD>, trust integration, corporate actions support).
Platform distribution (private bank models, robo-advisors, 401k-style sleeves if/when allowed).
Regulatory comfort theater (audits, SOC-2, chain surveillance attestations, insurance certificates).
7) What would slow paperization (and why it’s unlikely near-term)
Mass, credible proof-of-reserves (PoR) standards for treasury companies/exchanges plus app-store/banking neutrality.
UX parity for self-custody (inheritance, credit, portfolio integration).
Policy détente explicitly protecting non-custodial rails.
Realistically, the momentum is the other way: defaults favor paper, and defaults decide behavior.
8) How to trade it
As paperization rises, position for lower vol. Don’t hold long-term positions in levered products, e.g. BITX, or pure-play Bitcoin miners (dilution machines), because they decay over time.
Keep a sovereign tail hedge. A self-custody position (proper OPSEC) preserves shock convexity in regime breaks.
Fade “freedom beta”. Be skeptical of narratives that depend on Medium-of-Exchange dominance; the revealed preference is Store-of-Value via wrappers.
9) What this looks like if you were running the playbook
You never outlaw self-custody; you make it inconvenient, illiquid, reputationally risky, and financially inferior to ETF exposure.
You amplify carrots (credit, estate, insurance) and automate sticks (Acceptable Use Policies, app-store distribution, bank compliance checklists).
You push treasury desks and family offices over the line first — because they set the norm others copy.
You let the public celebrate the “institutional adoption” while the Medium-of-Exchange use case withers from lack of incentives.
Bottom Line
Incentives > ideals. The Controllers don’t need to win the argument; they need to set the defaults. In-kind transfers, collateral utility, and governance convenience are the decisive defaults. The rest is gravity.