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Digital asset funds see 6th week of outflows, but the pace has slowed

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(Kitco News) - Listed digital asset investment products continue to experience redemptions, though the pace has slowed, as the latest funds flow report from CoinShares shows that a total of $9 million was pulled from these funds during the week ending September 22.

“Volumes were low at US$820m for the week, well below the US$1.3bn average for the year so far, matching a similar low volume trend in the broader digital asset market,” said James Butterfill, head of research at CoinShares.

The crypto market has struggled to gain momentum in recent weeks in the absence of any notable developments as the recent spot Bitcoin ETF applications remain stuck in SEC-approval limbo while the ruling that XRP is not a security is headed to an appeals court.

Digital asset fund flows. Source: CoinShares

“Similar to the prior week, a divergence in sentiment from a regional perspective was evident this week too, with inflows into Europe totaling US$16m, where investors see recent regulatory disappointment as an opportunity,” Butterfill said.

Products listed in Germany saw inflows of $18.1 million, but this was offset by $14.1 million worth of outflows from U.S.-listed products, while countries in the “other” category saw $12.6 million in outflows.

Flows by country. Source: CoinShares

The continued redemptions brought the month-to-date outflow total to $125.5 million and reduced the year-to-date (YTD) total inflows to $40 million.

Bitcoin (BTC) continues to be the main focus for institutional investors, with long products seeing their third consecutive week of outflows totaling $6 million, while short-Bitcoin products experienced $2.8 million in outflows.

Flows by asset. Source: CoinShares

“The US$15m inflows into short-bitcoin for one week this month look more like an isolated event as there have been outflows totaling 78% of assets under management (AuM) over the course of the last 22 weeks, suggesting investors are continuing to capitulate over their short positions,” Butterfill said.

Ethereum also experienced a sixth consecutive week of outflows, with $2.2 million being pulled from Ether products last week, bringing the YTD total redemptions to $115 million compared to Bitcoin’s YTD inflows of 148 million.

“Multi-asset investment products have also suffered this year, seeing a small but steady trickle of outflows that now total US$32m for the year so far,” Butterfill said. “It seems investors are becoming more discerning in the altcoin space though, with continued inflows into XRP and Solana totalling US$0.66m and US$0.31m respectively.”

According to Matteo Greco, research analyst at Fineqia International, “Despite the conclusion of the summer season and the anticipated resumption in typical trading activity, digital asset market volumes remain low both on centralized exchanges and on-chain.”

Greco said the biggest factor affecting financial markets currently is the economic policies enacted by the Fed and other central banks, which have redirected capital towards less risky investments such as government bonds. “These bonds currently offer an attractive risk/reward ratio, offering a passive income while mitigating portfolio risk,” he said.

MicroStrategy remains bullish on Bitcoin, purchases $147.3 million worth

In terms of positive developments for the crypto market, Greco noted that both Bitcoin and Ethereum have seen an increase in their 7-day moving average of active addresses over the past week. Ethereum saw 508,000 active addresses, its highest average in 2023, while Bitcoin recorded 1.11 million active addresses, the highest level since 2021.

“Furthermore, Bitcoin's hashrate continues its upward trajectory, achieving a new all-time high in the past week,” he said. “Hashrate, a measure of a blockchain's computational power that impacts network security and mining difficulty, has reached record levels multiple times in 2023, despite Bitcoin's price significantly falling from its all-time high of $69,000 recorded in November 2021.”

The network has also done a lot to overcome the negative stigma associated with the amount of energy used to mine Bitcoin, as recent estimates indicate that more than 50% of Bitcoin mining now originates from renewable sources, “marking a significant milestone for the network's sustainability,” Greco said.

Touching on developments related to Bitcoin liquidity, Greco noted that “The price slippage for $100,000 sell orders on centralized exchanges within the BTC/USD pair is diminishing.”

“Price slippage, which represents the variance between an anticipated trade price and the executed trade price, is decreasing, indicating improved market liquidity,” he said. “Low liquidity levels and the challenges faced by market makers have been key issues in the digital asset market throughout 2023. Enhanced liquidity depth would play a pivotal role in promoting increased trading activities and revitalizing the market.”

He also highlighted that the Bitcoin dominance metric “remained relatively stable,” which “confirms minimal volatility and price fluctuations across the broader market during the past week.”

Greco said that trading volumes on centralized exchanges as measured over a 7-day period also continue to see limited activity, with the cumulative trading volume over the last seven days amounting to approximately $10.5 billion. This reflects “an 8.5% decrease compared to the preceding week, but still higher than the lowest levels reached in the initial week of September,” he said.

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