Crypto investment products have experienced the largest weekly outflow of 2023 as institutional investors fear the increasing regulatory crackdown in the United States. According to CoinShares, digital asset investment products experienced outflows worth $32 million last week. The majority of these outflows, approximately 78%, were from Bitcoin-related investment products, while the rest came from Ethereum and mixed-asset funds. However, blockchain equities bucked the trend with inflows totalling $9.6 million for the week.
CoinShares analyst James Butterfill attributed the outflows to ETP investors being less optimistic about the regulatory pressures in the US relative to the broader market. The Securities and Exchange Commission (SEC) has been ramping up what industry analysts have dubbed its “war on crypto” in recent months. The regulatory enforcement action responsible for the sentiment shift includes the SEC’s charges against Kraken for its staking services and its lawsuit against Paxos over the minting of Binance USD. Additionally, the SEC has proposed changes targeted at crypto firms operating as custodians.
Butterfill said that the negative sentiment from institutional investors was not mirrored by the broader markets, which saw a 10% gain for the period. This pushed total assets under management for institutional products to $30 million, the highest level since August. Institutional investors started pouring capital back into crypto funds in January, with inflows for the last week of the month totalling $117 million, reaching a six-month high. However, funds have seen outflows for the past fortnight following four weeks of inflows in January.
The fear of increased regulatory scrutiny has shaken investor confidence in the cryptocurrency market, which has been on a rollercoaster ride in recent years. Although the industry has come a long way since the launch of Bitcoin over a decade ago, there are still challenges to overcome, and the regulatory crackdown is just one of them. Nevertheless, some investors believe that the increased scrutiny is a positive development that will weed out bad actors and improve the overall credibility of the industry.
In the wake of the regulatory crackdown, some crypto investors have turned to short funds to hedge their bets against the market. According to CoinShares, there was an inflow of $3.7 million to Bitcoin short funds, indicating that some investors believe that the crypto market is due for a correction.
As the cryptocurrency market matures, it is likely that we will see more regulatory scrutiny, which could have a profound impact on investor sentiment. However, the industry is also evolving rapidly, and new technologies and innovations are emerging that could help to drive growth and adoption. It remains to be seen how the regulatory environment will evolve, but one thing is clear: the cryptocurrency market is here to stay, and it will continue to evolve and grow in the years to come.