How Bitcoin ETFs Inflows and Outflows Impact BTC Price

The introduction of spot Bitcoin exchange-traded funds (ETFs) on U.S. exchanges in January 2024 has significantly influenced the Bitcoin market dynamics. The development has paved the way for institutional investors, who were previously hesitant due to the regulatory ambiguities and the complexities of trading and storing cryptocurrencies, to enter the Bitcoin market in a safe and regulated manner. Amid continued interest in spot ETFs, Bitcoin price hit an all-time high of $73,750 in March 2024.

Soon after the launch, Bitcoin spot ETFs drew significant investments. The situation shifted in April and early May when outflows reached more than $1.2 billion. Despite this downturn, the past two weeks have seen a strong recovery, with $1.3 billion flowing back into these ETFs. This recent influx has compensated for April’s losses, bringing their total net gains since launching to approximately $12.3 billion.

 

Total Bitcoin spot ETF net inflow (USD). Source: Coinglass.com

Predicting Bitcoin Price with ETF Flows

Recent research by Mieszko Mazur and Efstathios Polyzos examines the effects of these newly established Bitcoin spot ETFs on the price of the leading cryptocurrency. The paper suggests the strong predictive power of net flows to Bitcoin spot ETFs on BTC prices. Per the research, this relationship is so strong that a one standard deviation increase in net flows (about $3 billion) results in a Bitcoin price appreciation of $9,300.

Bitcoin ETFs net flows and Bitcoin price. Source: Mieszko Mazur, Efstathios Polyzos

According to the paper, despite the initial negative net flows causing a decline in Bitcoin prices following the ETFs’ launch, a significant increase in net flows after week 4 led to a rapid price rise, peaking at an all-time high. The study further explores the relationship between Bitcoin price movements and ETF trading volumes. It claims that increases in Bitcoin prices are shown to lead to abnormal trading volumes in the ETFs, highlighting the interconnected nature of price and volume dynamics.

Bitcoin Price Returns Generated Outside US Trading Hours

The analysis reveals that 95% of Bitcoin price returns are generated outside of US exchange trading hours. This suggests that significant price movements are driven by market participants who are active outside the ETF trading window, such as international traders and algorithmic trading systems.

Bitcoin performance during ETF trading vs. non-trading hours. Source: Mieszko Mazur, Efstathios Polyzos

The finding is in line with an April report from Bloomberg that showed automated trading protocols in Asia react to flow data from US ETFs . According to the report, these trading bots can automatically analyze and react to this data, resulting in buying or selling actions. This pattern of flows helps explain why market returns during Asian trading hours were particularly strong in February and early March but weakened later in March.

The impact of algorithmic protocols dumping Bitcoin extends beyond the spot market and affects the derivatives market as well, the report said.

“By their very nature, inflows into the ETF structure are “buys” and outflows are “sells,”

Abdul Rafay Gadit, CFO and co-founder at decentralized social-investing marketplace Zignaly, told Cryptonews.com. He added that ETFs have a holdings mandate, which includes guidelines on how much of the fund’s assets can be held in different forms such as cash, stocks, bonds, or other securities. “If they can’t hold more than 10%, for example, in cash, inflows would necessitate a buy of BTC,” Gadit said. Similarly, suppose redemptions (outflows) increase the fund’s cash holdings beyond the mandated levels (for example, below an 8% threshold). In that case, the fund must sell some of its Bitcoin holdings to reduce its cash holdings to within the required limits.

Impact of Bitcoin ETF Flows on Price “Exaggerated”

Some analysts believe the impact of spot Bitcoin ETF inflows and outflows on Bitcoin’s price has not been necessarily transformative. “The impact of ETF inflows/outflows is slightly exaggerated,” Ruslan Lienkha, chief of markets at cryptocurrency exchange YouHodler, told Cryptonews.com.

“Until now, ETFs have played with just a few percent of all Bitcoin free-float; the dependency is likely the opposite. When Bitcoin price rises, it attracts more retail investors to buy BTC ETFs, resulting in inflows; when it falls, retail investors sell ETFs in panic, therefore leading to outflows.”

Likewise, a report from The Block suggests that negative investment flows and unfavorable macroeconomic news typically lead to poor price performance in financial markets. Conversely, positive macroeconomic news can mitigate the impact of negative flows, at least temporarily. Therefore, it’s important to monitor investment flows, but they should not be the sole focus, especially for short-term decision-making, according to Teddy Fusaro at Bitwise. “Spot Bitcoin ETF flows are important, but they are just one part of a much larger, dynamic marketplace,” Fusaro told the media.

Major US Financial Institutions Buy Spot ETFs

A significant number of major US financial institutions, including banks, investment managers, hedge funds , and professional firms, have embraced spot Bitcoin ETFs in recent months, 13F filings submitted to the SEC show. Data shared by K33 Research, a digital assets investment analysis platform, revealed that as of March 31, 937 professional firms had invested in the spot Bitcoin ETF market.

Among the notable investors, Millennium Management, a heavyweight hedge fund, and Susquehanna International Group (SIG), a global quantitative trading firm, reported $2 billion and $1 billion in spot Bitcoin ETF investments, respectively. Bracebridge Capital, a Boston-based hedge fund managing funds for prestigious universities like Yale and Princeton, and Boothbay Fund, a New York-based fund manager, also made significant purchases of ETFs, with investments worth $434 million and $377 million, respectively. Morgan Stanley, a leading U.S. banking firm, and Pine Ridge Advisers, an advisory company, disclosed investments totaling $269 million and $205.8 million, respectively. Additionally, alternative asset manager Aristeia Capital, investment firm Graham Capital, and hedge fund manager Crcm LP reported notable exposures of $163.4 million, $102.6 million, and $96.6 million, respectively, to Bitcoin ETFs.

“A majority (52%) of the nation’s largest hedge funds are betting on Bitcoin,” Sam Baker, research analyst at brokerage firm River, wrote on X . “With the introduction of Bitcoin ETFs, institutions have run out of reasons to say no to sound money.”