Bitcoin’s bear markets are getting milder. The bull markets may be next

Before the ETFs, bitcoin ownership tilted more heavily toward retail investors, crypto-native funds and traders making tactical bets, Rasmussen said. ETFs gave financial advisers and other professional investors a familiar way to add bitcoin to traditional portfolios.

Those investors tend to approach bitcoin differently.

Rasmussen said a professional investor might allocate around 2% of a portfolio to bitcoin, while crypto-focused retail investors can have 20%, 30%, or more of their money tied to the asset. A crash, therefore, looks very different depending on who owns it.

“If it goes down 50%, my portfolio is only down 1%,” Rasmussen said in an interview, describing how an investor with a 2% allocation might view the decline.

There is also rebalancing. An adviser targeting a 2% bitcoin allocation may buy after a steep decline to bring the position back to its target weight. If bitcoin surges and reaches 5% of the portfolio, that same investor may sell some at the next rebalancing.

That could soften sell-offs, but also limit the size of rallies.

Mark Connors, chief investment officer at Risk Dimensions, expects growing institutional participation to contribute to smaller drawdowns than the 70-80% declines seen in previous cycles.

But investors shouldn't expect to get something for nothing. Connors said bitcoin's volatility has fallen over time, but its returns have moderated as well. More institutional investors could mean “smaller blow-off tops due to rebalancing,” he said.