The Cooling Love Affair Between Institutional Investors and Ethereum

Updated: 12 September 2023

Disclosure

Don’t invest unless prepared to lose all the money you invest. This is a high-risk investment, you shouldn’t expect to be protected if something goes wrong.

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James Butterfill, the research chief at CoinShares, has recently termed Ethereum as the “least favored digital asset” among large-scale exchange-traded product (ETP) investors. This comes as the cryptocurrency has seen an outflow of approximately $108 million this year, marking it as the most divested digital currency among big players.

The CoinShares report revealed that just this past week, Ethereum faced an exodus of $4.8 million, widening its lead over the second most divested asset, Tron, by a margin exceeding $50 million. The sentiment for institutions towards cryptocurrencies in general isn’t too hot either; the report indicated a fourth straight week of selling, leading to a total outflow of $59 million over the week.

In terms of geography, North America seems to be leading the pack in the sell-off, with the U.S. and Canada shedding $12.3 million and $17.6 million respectively in the last week alone. Germany was the forerunner in Europe, recording a sell-off of $20 million.

Turning Tides?

However, the tides could potentially shift. Cathie Wood’s Ark Invest recently filed for the United States’ first Ethereum ETF. This development came on the heels of Ethereum’s network becoming inflationary and a notable decrease in on-chain activity, partly attributed to the ongoing bear market.

Butterfill, in an interview, traced the root cause of the wide-scale selling back to the U.S. dollar’s current strength. According to him, the market is optimistic that we’re headed for a “soft landing scenario,” reflected in eight consecutive weeks of the dollar strengthening. Yet, he predicts this will likely change, especially if high-interest rates come into play by year’s end.

Literally

— Elon Musk (@elonmusk) March 18, 2023

The CoinShares analysis also revealed a drastic drop in trading activity. While a prior report showed trading volumes surging 90% to $2.8 billion, Butterfill states that volumes are now “super low,” averaging merely $2.3 billion per day in the past month. The last week was even more dismal, showing a 73% drop to $743 million. This, he said, signals an “apathetic investor,” though he noted that we’ve seen a similar apathy right before the previous two Bitcoin halvings.

Timing wise this is interesting as the inflows in March also came at a time of heightened regulatory uncertainty

Bitcoin hasn’t been safe from the bearish sentiment either. Last week saw a significant outflow of $69 million from large investors, despite showing positive numbers the week before. Bitcoin short products also saw a notable increase in investments, around $15 million, which Butterfill finds timely given the current climate of regulatory uncertainty.

Regarding the future, Butterfill considers the upcoming moves by the Federal Reserve concerning interest rates as a crucial factor. A weaker dollar could provide some respite for Bitcoin. On a concluding note, he warns that the Consumer Price Index (CPI) might exceed expectations due to a sudden spike in gasoline prices, and also mentions the need to keep an eye on asset sales like FTX’s ‘stock overhangs.’

So, while Ethereum may currently be out of favor among institutional investors, various factors like regulatory decisions and market conditions could soon alter the landscape.