Bitcoin ETF flows are bearish

The price of Bitcoin and crypto in general has been soggy over recent weeks, and so have bitcoin ETF flows, which have turned slightly negative for six out of the last eight trading days. The chart below shows inflows and outflows in USD millions for all of the Bitcoin ETFs. Grayscale’s GBTC has seen daily outflows because they are charging 1.5% in fees on their legacy AUM while the others are charging a small fraction of that. As a result, holders of GBTC are selling outright, or selling to rotate into the cheaper ETFs over time.

BTC ETF Inflows and outflows in April. Source: Farside UK

The net amount of inflows into Bitcoin ETFs to date, including the outflows from Grayscale, amount to $12.2B. The anticipation of the ETF approval and launch, combined with the upside surprise of the speed and size of inflows have driven BTC from $25k in Q3 2024 to $61.5k today (and as high as $73k earlier this month). However, the inflows have gone sideways since mid-March and are now starting to show signs of reversing.

Source: Farside UK

In the first table at the top of this page, look at the three circled numbers. The first is 18.1 - that’s the lowest inflow Blackrock’s IBIT ETF has seen since it launched on Jan 11. The day that number goes from positive to negative will be the day the market realizes the tailwind from ETFs is over.

The second and third circled numbers, -7.3 and -42.7 are outflows from the Bitwise and ARK Bitcoin ETFs. This is the first ever daily outflow from Bitwise and the second largest outflow ARK has seen since it launched. The overall picture looks like the inflows are rolling over into outflows.

Remember what happened in the BTC run up from Jan 25 to Mar 11? The market saw the daily inflow numbers and bought BTC, which led to more FOMO-driven inflows into ETFs, creating a feedback loop that led to higher prices. This process can easily work in reverse. Those who bought ETFs are not crypto-native HODLers - they are boomers and institutions who will sell at the first sign of weakness to manage their risk. Once they sell, the outflow numbers will be a signal for others to get out as well.

The ETF inflows have essentially been a transfer of wealth from boomers and institutions to crypto natives who took profit on their BTC and rotated into alts, NFTs, and memecoins. However, crypto advantage of this bull market by creating thousands of new shiny assets to buy, diluting the crypto-native capital and causing the entire market to collapse under its own weight.

The top 12 memecoins by market cap. The majority were created in this current cycle

Because of inflation resulting from unchecked token creation, crypto needs constant inflow of capital for prices to continue rising. The amount of token creation and speculation that has taken place over the last three months was on par with late cycle behavior. Now that the injections of capital from BTC ETFs have been turned off, it’s likely that we will see the current cycle end much sooner than previous cycles have.

Another factor working against BTC and crypto overall is that we may be transitioning out of a disinflationary or reflationary (the best environments for crypto) regime into a stagflationary regime. This would be an environment where concerns over inflation and monetary tightening cause the market to de-risk and deleverage. I’ll leave that discussion for another post.

I said in my last post that crypto should be part of every investor’s strategy, and provided a roadmap of how to do it:

However, don’t just buy and hodl crypto up and down through the cycles like a roller coaster. Most coins will draw down 80-95% during a crypto bear market - even bitcoin had a drawdown of 77% in the last cycle. Accumulate bitcoin and other crypto at the bottom of the cycle and get out near the top. Easier said than done of course. There are two ways to get good at spotting cycle bottoms and tops - having experienced previous cycles and knowing what they looked and felt like, and studying metrics that show the flow of capital and measure sentiment and leverage.

Now is the time to be reducing crypto exposure, and being cautious about crypto in general. I alerted paid subscribers that I was adding BTC and crypto as a long-term allocation last October when BTC was at 33200. I’m unwinding most of that exposure today (BTC is currently 61700). As always, I can be wrong - what if there is a second wave of ETF buying from Registered Investment Advisors in the US (who manage trillions of capital but are slow to move)? What if this current bump in inflation ends up being an anomaly, and the disinflation trend resumes? These would be the two key drivers that would make me want to get back into crypto, and I’ll alert paid subscribers if and when I make that move. For now, the reasons to be bullish crypto are looking tenuous.

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