Investors withdrew nearly $500 million from cryptocurrency-linked funds following a severe market downturn, marking the first significant selloff of these speculative assets since the introduction of exchange-traded funds (ETFs) earlier this year.
Data from Bloomberg reveals that Bitcoin-focused ETFs experienced four consecutive days of outflows totaling approximately $423 million. This marks the most substantial weekly withdrawal since early May for the group of nearly a dozen spot ETFs that debuted in January.
The global decline in risk assets has been exacerbated by disappointing U.S. job data, which heightened recession fears, compounded by weak corporate earnings and poor seasonal trends. The cryptocurrency market has not been immune: Bitcoin has plummeted over 16%, erasing more than $150 billion in market value within the last 36 hours and diminishing the attractiveness of ETFs. Ether, the second-largest digital asset, is experiencing its steepest decline since 2021.
This market rout represents a significant stress test for digital assets in the era of U.S. cryptocurrency products, which have allowed retail investors easier access to Bitcoin trading since their approval by the Securities and Exchange Commission (SEC).
Spot Ether ETFs, which launched in July following SEC approval, are also facing outflows. The cumulative net outflows for these funds have surpassed $500 million since their inception, according to Bloomberg.
Barry Knapp, managing partner at Ironsides Macro, commented on the volatility, stating, “They remain speculative assets. To think it wouldn’t be volatile in a situation like this — I think it’s to be expected.”
Despite the extensive selling, liquidity disruptions have been minimal. For instance, the bid-ask spread for BlackRock Inc.’s iShares Bitcoin Trust (ticker IBIT) has remained tight, even though the fund’s shares have dropped by 11.5%.
Traders invested in other crypto-linked products are also facing losses. The 2x Bitcoin Strategy ETF (BITX), which saw $1.8 billion in inflows this year, has declined by 20% over the past two weeks. The ProShares Ultra Bitcoin ETF (BITU), with $340 million in assets, fell by 30% on Monday alone.
The current downturn has surprised some observers, given Bitcoin’s origins as a hedge against a flawed global financial system. Zach Pandl, head of research at Grayscale, noted, “The undisciplined approach to monetary and fiscal policy is one of the reasons investors hold Bitcoin in the first place, so there is no reason to reconsider the longer-term bullish outlook for the asset class.”
Stephane Ouellette, CEO of FRNT Financial, highlighted that Bitcoin’s 24/7 trading makes it more susceptible to global events, increasing its volatility. He pointed out recent geopolitical crises and the pandemic-induced market crash as examples of events that have led to sharp selloffs. Ouellette added, “For traders looking for fast cash last night, BTC would have been a highly attractive option. But the current environment feeds into the asset’s core thesis. For those who believe monetary policy has been mismanaged since the financial crisis, this is the type of scenario they envisioned when investing in BTC.”
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