Tuesday marked the largest single-day outflow from cryptocurrency exchange-traded funds (ETF) since their inception, with bitcoin’s loss exceeding US$500 million and Ethereum products shedding nearly US$400 million.
This comes after both cryptocurrencies reached record highs just last week, much of which was the result of ETF inflows.
According to Rachael Lucas, a cryptocurrency analyst at BTC Markets, the bleed suggests big investors are either locking in profits now or heading for the sidelines ahead of the Fed’s decision.
“Because spot ETFs require issuers to sell the underlying coins, these redemptions aren’t just paper moves, they hit order books directly, creating real selling pressure. That explains the spike in intraday volatility across BTC and ETH,” she said.
Lucas explained that while redemptions negatively impact prices and keep sentiment cautious in the short term, ETFs are now “too big to ignore” in the medium term – holding 6.5 per cent of bitcoin’s supply and 5.2 per cent of Ethereum’s market cap.
Additionally, the outflows indicate that conviction is wobbling more in Ethereum than in bitcoin, only a week after it surpassed US$4,600 for the first time.
However, Global X investment analyst Justin Lin said that based on the speed of cryptocurrency ETF inflows so far, similarly high-velocity outflows shouldn’t come as a surprise.
“For Ethereum especially, momentum and inflows had just started picking up on a combination of clearer stablecoin policy, high-profile crypto IPOs and investors expecting a shift from bitcoin season to alt-coin season; but instead of breaking out higher, it was met with resistance from sellers as it approached all-time highs,” Lin said.
He explained that worsening risk-off sentiment is now exacerbating the sell-off, likely vindicating those who took profits or exited early. At the same time, Lin said flows could flip positive just as quickly.
“The market is just waiting on clarity, that will come in the form of Jackson Hole [Economic Symposium] this weekend, as well as CPI, unemployment numbers, then finally the rate decision in September,” he said, adding that flows could just as easily worsen if economic data or Fed signalling validates a worsening outlook.
For his part, Lin said he doesn’t think there was a single catalyst causing investors to pull their funds. Rather, it was part of a broader trend over the past week, as investors rotated away from saturated risk-on investments like big tech and AI and towards more defensive sectors such as utilities, industrials and real estate.
Lin, similarly to Lucas, attributed this shift to worsening US economic data and rate cut uncertainty. Exacerbating these concerns, as Lin explained, is the absence of a clear desired outcome.
“With the September rate decision approaching, many analysts see a ‘lose-lose’ situation where both a cut or no cut can be perceived as either reigniting concerns over tariff impact or validating concerns on labour market weakness,” Lin said.
At the same time, Jamie Hannah, deputy head of investments and capital markets at VanEck, pointed out that Australia didn’t experience the same outflows as the US market and the two aren’t as intertwined as some might think.
“The reality is that bitcoin is a highly volatile asset and demonstrates a high beta to growth stocks, which can manifest as sharp swings on the downside as well as the upside,” Hannah said.
Looking forward, Lin argued that in the long term, ETFs are more likely to be a stabilising force on the cryptocurrency market than to cause volatility.
In his view, ETFs have been a hugely “democratising” force in the space, allowing more access to many more holders and increasing the amount of money overall. Over time, this will reduce the dominance of cryptocurrency “whales” and market-moving wallets, making the space more stable.
“As crypto matures, the investor base will gradually move away from retail dominance toward institutions, which tend to be steadier, more fundamentally driven and less reactive to short-term noise,” he said.
He envisages cryptocurrency ETFs becoming similar to gold ETFs, which now play a major role in setting the gold price.
“We also expect crypto ETFs to increasingly become price makers rather than price takers in the crypto space, especially for bitcoin, where ETF uptake has been unmatched,” he added.
As at Thursday afternoon, the price of bitcoin was down 3.25 per cent over the week to US$113,712.20, while Ethereum lost 2.84 per cent to sit at US$4,300.56.
