Published: July 26th, 2023
Following a period of robust inflows to crypto funds, big investors have pulled an about face and begun moving their money elsewhere.
New figures from CoinShares show that a total of USD 6.5 million left crypto investment products last week. The reversal occurred after four consecutive weeks of inflows totaling USD 741 million.
Most of the money was focused on Bitcoin and flowed out of large funds for accredited investors and run by the likes of big firms like Grayscale and 21 Shares.
At time of writing, Bitcoin had fallen back to USD 29,200 after reaching a five-day high of USD 30,240, a drop of nearly three per cent in 48 hours.
For crypto investment products, there are signs that some portfolio rebalancing may be in the works. CoinShares noted that investors also placed USD 6.5 million into Ethereum funds during the same period.
‘While overall crypto sentiment from large investors has been negative this year, there are signs it may be starting to turn around,’ CoinShares said in a statement.
'The inflows and outflows are notable, but it is likely too soon to draw major conclusions about the direction of the market. Most of the outflow happened in short Bitcoin instruments, which could mean investors remain bullish about BTC’s long-term prospects.’
Institutional investors have spent much of 2023 moving money back into crypto. Crypto investment funds also saw a brief period last week where inflows actually surged.
Several high-profile asset managers are working to convince America’s chief financial regulator, the Securities and Exchange Commission, to green light their applications for a spot Bitcoin exchange-traded fund (ETF).
Traditional finance is sustaining its engagement with the crypto marketplace, even if sentiment seems unsettled.
A June report from crypto analytics firm Kaiko showed that Bitcoin’s correlation to the tech-centric Nasdaq 100 index had dropped to its lowest point in three years. That suggests a long-term de-coupling is underway, occurring even as the number one cryptocurrency reached its highest correlation with gold in several years.
Kaiko said that the Nasdaq 100 / BTC correlation had dropped to just 3 per cent. The index tracks the performance of the most actively-traded (and largest) non-financial-services firms listed on the Nasdaq exchange.
Kaiko analysts noted that the index's correlation with traditional risk assets has also softened steadily in 2023, dropping from an average of 60 per cent last year (2022). At the same time, Kaiko said that the Nasdaq 100 is now in bull market territory, up more than 20 per cent over lows hit in December 2022.
The firm highlighted Bitcoin’s susceptibility to ‘crypto-specific events’ such as the regulatory response to the FTX scandal. Tech stocks have felt some of the heat, but not to the same degree.
Analysts also said that a growing gap in volatility between tech stocks and crypto valuations reached a high point after the FTX collapse.
In a separate report, Kaiko said Bitcoin and gold have moved in opposite directions, strengthening their correlation to above 50 per cent. While the precious metal saw declines in June 2023, for the year-to-date it was up remains close to its USD 2,000 all-time high
Bitcoin was benefitting from a June rally triggered by the BlackRock ETF announcement, pushing past USD 31,000 in late June.
In Autumn 2022, BTC’s gold correlation provided crypto traders with compelling evidence that investors had begun to view Bitcoin as a safe haven asset.
Following a stretch of market correlation between BTC and gold, analysts at Bank of America Securities (BofAS) published a report saying that the world’s number one cryptocurrency had been tracking gold prices for an extended period, strongly indicating that investors were using it as a hedge against broader market volatility.
To be considered a safe haven, a financial asset must be able to shield portfolios from steep losses during an economic downturn. That requires them to be uncorrelated or negatively correlated to trends in the wider economy. Gold has traditionally played this role, providing a sturdy store of value in times of trouble.
The relationship between BTC and gold has historically been used to measure investor confidence in Bitcoin’s store-of-value credibility. Both moved broadly in parallel between June 2021 and March 2022.
If two or more assets demonstrate a positive correlation, they can be assumed to be responding to the same market stimuli. If they demonstrate a negative correlation, then the opposite is likely true.
At the end of August, the relationship between gold and BTC returned to positive, while in early October the correlation wound even tighter, touching the highest point in twelve months.
Within that period, Bitcoin’s relationship to the S&P 500 and Nasdaq 100 indices of blue-chip equities also reached all-time highs, though BoAS analysts say that correlation had begun to slip.
'A slowing positive correlation with blue chip stocks and a quickly rising correlation with gold tells us that investors have started looking at bitcoin as a relative safe haven to shield portfolios from macro uncertainty and wait for the market bottom to materialise.’
In October 2022, Kaiko data showed that Bitcoin had become more stable than both the Nasdaq and S&P 500 for the first time since 2020.
That month had otherwise been uneventful for BTC, which was up just 1.1 per cent over the previous 30 days.
While crypto as an asset class has a well-earned reputation for volatility, Bitcoin has been displaying longer and longer periods of relative calm.
A previous Kaiko report in October 2022 found that BTC's 20-day volatility had followed the peaks and troughs of the Nasdaq stock index for the first time in nearly two years. While Bitcoin’s price had been more or less the same since the beginning of September 2022, both the Nasdaq and the S&P 500 dropped by around 11 per cent through the same period.