‘Hot Money’ Flees Bitcoin ETFs at Record Pace in Risk Aversion
(Bloomberg) -- Investors have pulled a record $3.3 billion from US spot-Bitcoin exchange-traded funds in February, poised for the biggest monthly exodus since they debuted, as investors sought refuge in safer assets amid rising geopolitical tensions and persistent inflation concerns.
The group’s net outflow came amid a slide of as much as 28% in Bitcoin from its record high on the day Donald Trump was inaugurated as president, including its steepest monthly decline since June 2022. Other cryptocurrencies have also faltered, with an index tracking top digital tokens reaching its lowest level since the US Election Day in November. In all, the rout has wiped out roughly $1 trillion in crypto market value. Fidelity Wise Origin Bitcoin Fund (ticker FBTC) has posted the biggest outflow among these funds, amounting to more than $1.4 billion.
Investor sentiment has been rattled by Trump’s combative trade policies, which have reignited fears of economic disruption. Meanwhile, stubbornly high inflation has added to the mood, fueling a selloff in risky assets. Sentiment also worsened after hackers stole nearly $1.5 billion from the Bybit exchange, the biggest theft in the history of crypto, and traders suffered big losses on highly speculative tokens known as memecoins.
“Hot money that chases Bitcoin, or any speculative trade, flows out as fast as it entered when prices start falling,” said Michael Rosen, chief investment officer at Angeles Investments. “It’s a good reminder that Bitcoin is not an investment, it is a highly speculative trade.”
While Bitcoin funds are seeing an exodus, investors added nearly $18 billion this month to SPDR S&P 500 ETF Trust (SPY), the most since December 2023 and a reversal from January’s outflow, and $6 billion into Invesco QQQ Trust (QQQ). Those flows came even as the Nasdaq 100 Index dipped as much as 7.3% from its last record on Feb. 19.
Strategists at Bank of America Corp. wrote that Bitcoin’s inability to stay above the $97,000 mark was the first sign of what they call the “bro bubble” popping.
The token had traded in a narrow range near $95,000 for most of the month before this week, after reaching a record of about $109,000 on Jan. 20.
“We are observing a notable reversal of the post-election market dynamics that had initially been driven by expectations of a pro-business, pro-market administration following candidate Trump’s victory,” said Raphael Thuin, head of capital market strategies at Tikehau Capital SCA. “Bitcoin’s struggles are further compounded by broader weakness in the tech sector.”
Based on CME futures, there is risk that Bitcoin prices can go lower to the mid-$70,000 level, according to Paul Howard, senior director at market maker Wincent, adding that Trump’s crypto-related announcement have disappointed some traders.
“What’s been driving this is the lack of positive executive-order news some pundits were expecting, and US inflation numbers,” he said.
To be sure, the recent exodus of funds from spot-Bitcoin ETFs represents only about 3% of the total assets they hold. And some of the outflows likely stem from hedge funds unwinding a popular trading strategy called the basis trade, which exploits differences in prices between spot and futures markets. Some have also used the ETFs to profit from the cryptocurrency’s volatility or offset a short position in derivatives.
“Bitcoin’s ETF outflows are driven mostly by arbitrage players like hedge funds playing a basis trade via futures and/or options,” said Mark Connors, founder and chief investment strategist at Risk Dimensions. “Of course there is the outright seller, but we see the majority from profitable arb opportunities that spiked in this most recent downturn.”
Meanwhile, US investors have taken refuge in gold, pouring more than $6.3 billion in products investing in the precious metal, according to data compiled by Bloomberg News. This is why Citigroup strategists including Alex Saunders think Bitcoin’s digital gold moniker is “still premature.”
“Crypto is still an emergent asset,” they wrote in a note. “And, as such, we think the return drivers mean a higher correlation to equities than gold and, consequently, less portfolio diversification.”