The spot bitcoin exchange-traded funds (ETFs) experienced significant inflows during the first quarter, even amid underwhelming price movements. One analyst believes that the upcoming three months may be even more fruitful, regardless of whether prices rebound.
“Even if we continue to see current market dynamics in the second quarter, there’s notable engagement from financial advisors and institutional players,” remarked a senior investment strategist in the sector, whose firm is associated with a bitcoin ETF.
“While retail participation is subdued due to a strong focus on price fluctuations, institutional investors are acknowledging the growing global acceptance of bitcoin, driven in part by political support, and many are viewing these market conditions as a chance to initiate or amplify their investments,” the strategist continued.
The ETFs attracted more than $1 billion in net inflows in the first quarter, despite a tough macroeconomic climate that led to the largest quarterly decline for the S&P 500 Index since 2022, compounded by a 13% drop in bitcoin’s value.
The strategist anticipates that inflows might escalate to as high as $3 billion or even beyond in the second quarter, especially as brokerage platforms open up and regulatory developments progress.
ETF inflows may obscure underlying investor interest
The $1 billion in net inflows during the first quarter—and whatever the second quarter yields—doesn’t necessarily signal widespread enthusiasm for buying the bitcoin dip. This is largely due to the basis trade, where institutional investors purchase the spot bitcoin ETF while simultaneously shorting CME bitcoin futures, allowing them to earn yield without being affected by price changes.
This yield was in the double-digits late last year and remained comfortably above risk-free rates for much of the first quarter. However, it has recently plummeted to around 5%, indicating that arbitrage-driven ETF inflows might diminish.
A return to the bullish narrative: It’s still early
“Although a favorable price climate would surely help, it’s crucial to keep in mind that the adoption of spot bitcoin ETFs among these groups is still at an early stage,” noted the president of an ETF-focused firm, who is optimistic about inflows for the remainder of the year. “As more advisors become comfortable allocating to bitcoin, it should create a significant boost in inflows,” he added.
Many institutions have already made initial allocations to bitcoin over the past year, but these still represent a small portion of ETF investments, with the majority of capital coming from retail investors—something recently underscored by the CEO of a major asset management firm whose bitcoin ETF leads in asset accumulation among spot ETFs. A more favorable regulatory environment and potential government allocations to bitcoin could very well alter this ratio in the near future.
A survey conducted during an ETF conference in Las Vegas earlier this month revealed that 57% of advisors intend to increase their investments in crypto ETFs this year, as the asset class has shed its previous “reputational risk” label among advisors.
The perspective that bitcoin could function as a “safe haven” during economic downturns, which many investors are currently apprehensive about, might also enhance confidence in the asset, particularly as worries about a recession intensify.
“Should we continue to see expectations for rate cuts, signs of economic uncertainty, or escalating concerns about a potential recession in the U.S., Bitcoin’s role as ‘digital gold’ is likely to encourage further inflows,” stated the CEO of a digital asset management firm. “While some short-term traders may exit if price weaknesses endure, long-term investors will likely keep inflows robust, particularly as institutional adoption accelerates and drives demand throughout the year.”