Bitcoin ETF flows reverse as funds shed $1B on inflation fears

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US-listed Bitcoin ETF flows have experienced their most significant weekly capital outflow since late January, with investors withdrawing a total of $1 billion from the products.

The main reason for the sudden institutional risk aversion seems to be the changing economic situation in the United States.

CryptoSlate\’s data indicates that growing concerns about inflation, coupled with substantial ETF outflows, have caused Bitcoin’s price to drop by approximately 3% over the past week to $78,074 at the time of writing.

US Bitcoin ETF flows register largest weekly outflow in 5 months

Data from SoSoValue shows that the $1 billion ETF outflow ended a six-week streak of consecutive positive inflows. During this period, the US-listed funds had attracted around $3.4 billion in net flows.

However, the net outflow over the past seven days amounted to approximately 14,000 Bitcoin, signaling a notable pause in the recovery of institutional demand that had been steadily increasing since early April.

Despite the substantial weekly outflows, Ecoinometrics, a Bitcoin-focused analytics platform, described the figure as a period of cautious pause at a crucial macroeconomic juncture rather than a complete unwinding of institutional positions.

The firm noted that the overall recovery trend for digital assets appears to be intact, as net flows into US spot Bitcoin ETFs have remained positive in the last 30 days.

US inflation data sheds light on ETF demand decline

In a recent market report, Coinbase, the largest US-based exchange, highlighted that resurging inflationary pressures are hindering the potential for a broader liquidity-driven rally in digital assets.

According to the exchange’s analysis, higher-than-expected Consumer Price Index (CPI) and Producer Price Index (PPI) readings have prompted financial markets to swiftly reassess inflation risks.

While initial jobless claims remain low, indicating a strong labor market, decreasing real wages and waning consumer confidence suggest underlying economic challenges.

Ecoinometrics supported this view, noting that investors are becoming increasingly cautious about adding risk exposure without a clearer understanding of the Federal Reserve’s upcoming monetary policy decisions.

The firm pointed to specific details in the latest CPI report as a cause for alarm. The rise in core inflation and core services inflation, excluding volatile food and energy costs, suggests persistent price pressures embedded in the broader economy rather than a temporary external shock.

Consequently, traditional risk assets, such as US equities and Bitcoin ETFs, are grappling with near-term monetary uncertainty rather than swiftly transitioning out of a risk-on environment.

The firm added that the foundational demand that drove billions of dollars into crypto ETFs during the spring has paused but not collapsed structurally.

What could reignite Bitcoin’s liquidity trade?

Given the circumstances, the future trajectory of Bitcoin funds hinges on whether last week’s outflows become a trend.

Ecoinometrics suggested that if ETF flows stabilize, the market could view the $1 billion withdrawal as a reset following a robust six-week recovery.

However, if outflows persist, it could indicate that institutional demand is no longer absorbing macro pressures at the same rate.

Meanwhile, US inflation data presents the second challenge. Coinbase analysts stated that a sustained “beta expansion” would likely require a clear improvement in systemic liquidity or a noticeable downward trend in inflation. Beta expansion measures BTC’s volatility and returns relative to the broader market.

This implies that a more favorable data trend would help bolster the case for improved liquidity and instill more confidence among traders that the Fed could eventually shift towards a more accommodative monetary policy.

However, a further increase in core or services inflation would probably maintain elevated yields and continue to restrict Bitcoin from expanding beyond its current range.