The Role of ETFs in the Crypto Market Crash

Did ETFs play a role in triggering the recent crypto market crash? 

Apparently, it would seem so, but it’s difficult to quantify. They might have played a fundamental role, or perhaps just a superficial one, and it’s not so easy to understand. 

The circulating hypothesis is that they did not generate it, but merely amplified it, although to be honest, it was not among the biggest crashes ever. 

The Crypto Crash

To understand the extent of the crash, it is advisable to analyze the trend of the price of Bitcoin and Ethereum, as well as that of the so-called Total3. 

Bitcoin is actually losing less than 10% compared to seven days ago, and less than 20% compared to thirty days ago. These are losses that cannot be considered monumental, given that in the past there have often been much deeper and faster crashes.

The situation becomes more serious for Ethereum, which is down 17% compared to seven days ago, and 28% compared to thirty days ago.

Although this is not an epochal crash, it remains a relatively significant decline, especially since compared to the all-time highs of August, it is at -33%, against Bitcoin’s -19%.

Other cryptos are performing much worse, such as Solana, which is down 20% compared to seven days ago, down 32% compared to seven days ago, and down 47% from its all-time highs. 

The Total3, which measures the market capitalization of all altcoins excluding Ethereum, stablecoins, and of course Bitcoin, is down 7% since Sunday, and down 19% compared to thirty days ago, which is more or less in line with Bitcoin. This indicates that there are altcoins performing worse than BTC, but also altcoins performing better. 

BTCUSDT and ETHUSDT rate by TradingView

Significant Outflows from Bitcoin and Ethereum ETFs

As for ETFs, it is advisable to focus only on Bitcoin and Ethereum, as the others are so small in scale that they are almost irrelevant in comparison. 

On BTC, since the end of October, all trading sessions have been closing with net outflows from ETFs. The worst figure is obviously from yesterday, with a substantial $566 million in daily net outflows, although still far from the all-time record of 1,113. 

It should be noted, however, that overall in the last five sessions the total net outflows amounted to $1.9 billion, which is still a small amount compared to the $60 billion in total net inflows since their inception (January 2024). 

The scenario concerning ETH on Ethereum is very similar, but with different percentages. 

The session with the highest daily outflows in the last five was yesterday, with $219 million, but the all-time highest daily outflow was $1,018 million, which is significantly greater. 

However, adding up the daily outflows of the last five sessions amounts to 718 million, which is proportionally more than BTC compared to the total inflows of 14 billion dollars since their inception (July 2024). 

The Role of ETFs in the Crypto Market Crash

It should not be forgotten that ETFs are actually shares traded on traditional exchanges, and not tokens traded on crypto spot markets. 

Furthermore, the actual token liquidations are carried out after the stock market session closes, so not while yesterday’s crash was occurring. 

It is important to remember that ETF managers do not liquidate tokens directly on crypto exchanges, but through OTC desks, which in turn may or may not be forced to sell on the exchanges. 

However, crypto ETFs are also the assets that represent crypto assets on traditional exchanges, therefore traditional investors and speculators use them as a benchmark. In particular, they are the preferred instruments for institutional investors to take positions in crypto, because they are fully regulated, which means that institutions likely operate primarily with ETFs in this market.

Therefore, it cannot have been the ETFs that caused the crypto market crash, but they certainly could have amplified it.