Major setback for crypto ETFs: Investors withdraw billions

In a massive shift away from speculative investments, investors have withdrawn around half a billion dollars from cryptocurrency-linked funds. This move marks the first significant sell-off since the broad adoption of crypto ETFs earlier this year. Exchange-Traded Funds (ETFs) that invest directly in Bitcoin have recorded outflows for four consecutive days amounting to approximately $423 million in total, according to data from Bloomberg. These outflows have led to the biggest weekly exodus since early May. The cause of this global downward trend is recession fears triggered by weak labor market data from the US on Friday. Coupled with disappointing corporate earnings and unfavorable seasonal trends, this has also heavily impacted the crypto market: Bitcoin has plummeted by more than 16%, erasing over $150 billion in market value in the last 36 hours. Ether, the second-largest digital currency, experienced the steepest decline since 2021. This sell-off represents the first major stress test for digital assets in the era of US crypto products, which have made it easier for retail investors to invest in Bitcoin. Spot Ether ETFs, introduced in July following SEC approval, are also experiencing outflows, with their net outflows now exceeding the $500 million mark. "These remain speculative assets," commented Barry Knapp, Managing Partner at Ironsides Macro. "To think that they would not be volatile in such a situation is, I believe, naive." Despite the massive sell-off, distortions have so far not been significant. A liquidity measure known as the bid-ask spread remained within a narrow range of just one basis point for BlackRock's iShares Bitcoin Trust (Ticker IBIT) even though the shares fell by 11.5%. Other crypto-linked products are also suffering losses. The 2x Bitcoin Strategy ETF (BITX), which had inflows of $1.8 billion this year, has dropped by 20% over the past two weeks. The $340 million ProShares Ultra Bitcoin ETF (BITU), which has taken in about $400 million this year, plunged by 30% on Monday alone. Some observers find the crypto crash perplexing, as Bitcoin emerged after the global financial crisis as an alternative to what was perceived as a flawed global financial system. Zach Pandl, Head of Research at Grayscale, emphasized, "The undisciplined approach to monetary and fiscal policy is one of the reasons why investors hold Bitcoin in the first place. Therefore, there is no reason to question the long-term optimistic outlook for this asset class." Stephane Ouellette, CEO of FRNT Financial, stated that the 24/7 trading of Bitcoin makes the asset more susceptible to adverse global events in the short term, thereby increasing its volatility. He pointed to recent geopolitical crises and the pandemic-induced crash in 2020. "For traders looking for quick gains last night, BTC would have been an extremely attractive option," he wrote in a note. "However, the current environment supports the core thesis of the asset. For those who believe that monetary policy has been poorly managed since the financial crisis, this is precisely the scenario they had in mind when investing in BTC.