Crypto ETF Complex Hit by Selling Spree in First Big Stress Test

(Bloomberg) — Investors pulled nearly half a billion dollars from cryptocurrency-linked funds as a global stock market crash triggered the first major sell-off in the speculative asset class since it entered the mainstream via ETFs earlier this year.

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Exchange-traded funds that invest directly in bitcoin have suffered four straight days of outflows totaling about $423 million, according to data compiled by Bloomberg. The outflows contributed to the worst weekly outflow since early May for the group of about a dozen spot ETFs that launched in January.

Risk assets fell globally on Friday after weak U.S. jobs data stoked recession fears, adding to a troubling mix that includes lackluster corporate earnings and weak seasonal trends. Cryptocurrencies were not immune: Bitcoin fell more than 16% — wiping out more than $150 billion in market value in the past 36 hours and denting the appeal of ETFs. Ether, the second-largest digital asset, is facing its biggest drop since 2021.

The crash represents the first major stress test for digital assets in the U.S. era of crypto products, which have offered everyday investors an easy way to trade Bitcoin since being reluctantly approved by the Securities and Exchange Commission.

Spot Ether ETFs, which launched with SEC approval in July, are also seeing outflows. The group’s total net outflows since launch have now surpassed the $500 million threshold, according to data compiled by Bloomberg.

“These continue to be speculative assets,” Barry Knapp, managing partner at Ironsides Macro, said on the phone. “To think that they wouldn’t be volatile in that situation — I think that’s to be expected.”

Despite the selloff, the disruptions haven’t been significant — so far. For example, a measure of liquidity known as the bid-ask spread for BlackRock Inc.’s iShares Bitcoin Trust (symbol IBIT) remained in a narrow range of just one basis point even as its shares fell 11.5%.

Elsewhere in the market, traders who have invested billions of dollars in other crypto-related products are also feeling the pain. The 2x Bitcoin Strategy ETF (BITX), which has taken in $1.8 billion this year, has fallen 20% in the past two weeks. The $340 million ProShares Ultra Bitcoin ETF (BITU), which has taken in about $400 million this year, is down 30% on Monday alone.

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For some, the decline in cryptocurrencies is surprising, as Bitcoin emerged in the wake of the global financial crisis as an alternative to a global financial system that its followers saw as deeply flawed.

“The undisciplined approach to monetary and fiscal policy is one of the reasons investors are holding Bitcoin, so there is no reason to reconsider the long-term bullish outlook for the asset class,” said Zach Pandl, Head of Research at Grayscale.

Bitcoin’s 24/7 trading will make the asset more vulnerable to negative global events in the short term and increase its volatility, according to Stephane Ouellette, CEO of FRNT Financial, who cited recent geopolitical crises that triggered heavy sell-offs this year, as well as the pandemic crash of 2020.

“For traders looking for quick cash last night, BTC would have been a very attractive option,” he wrote in a note on Monday. But “the current environment feeds into the asset’s fundamental thesis. For those who believe that monetary policy has been mismanaged since the financial crisis, this is the type of scenario they envisioned when investing in BTC.”

–With assistance from Vildana Hajric.

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