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James Carter

March 14, 2023

Breaking News: Bitcoin Records Dumped by Investors

According to the latest Digital Asset Fund Flows Weekly Report from CoinShares, last week was the first time that more money left digital asset investment products than came in. The net outflows of $255 million were equal to 1% of all assets under management (AuM) leaving the space.

Bitcoin Records Dumped by Investors

In terms of percentages of AuM, the amount of money that left crypto last week was the second most since May 2019, when AuM dropped by 1.9% in one week. Back then, though, this only added up to $52 million coming out of investment products for digital assets.

Bitcoin led the way out, with $243,5 million leaving long-term Bitcoin investments and only $1.2 million leaving short-term Bitcoin investments. Every week, $11 million left Ethereum. Altcoin net flows were close to neutral. Litecoin and Tron each lost $0.3 million in the capital, while Solana, XRP, and Polygon each gained $0.4, $0.3, and $0.1 million. A new $1.5 million was lost by other altcoins.

The year’s net inflows were wiped out by crypto product sales last week. Since the beginning of January, net flows have been -$82 million.

Investors Dumped Crypto on Banking Concerns

Investors probably sold their digital assets at such a high rate last week because they were worried about a string of high-profile US bank failures that were linked to cryptos, such as Silvergate and SVB Financial. Investors worried that the failure of these banks would make it harder to switch from fiat to cryptocurrency. They also worried about how Circle’s USDC stablecoin would be backed up since some of its reserves were kept at these banks.

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At one point last Friday, Bitcoin had dropped all the way back to test its 200-Day Moving Average and Realized a Price in the high $19,000s. Investors were probably also worried about the Fed’s continued hawkish message about the need for more interest rate hikes, which was best shown by a speech Fed chair Jerome Powell gave earlier in the week.

And Missed a Face Ripping-Rally

The investors who sold their crypto holdings, on the other hand, missed out on a huge gain over the past two days. Bitcoin was last trading in the low $20,000s, which is a huge 24% increase from its low point last Friday.

The rally is happening because 1) the US government stepped in to protect Silvergate and SVB depositors from any losses and started a new $25 billion liquidity program to help stop more bank runs, and 2) markets are pulling back hard on their predictions that the Fed will tighten monetary policy. People think that the Fed can’t keep raising rates when the US banking system is on the verge of failing. This is especially true since the Fed’s aggressive rate hikes have been the main cause of the problems.

According to the CME’s Fed Watch Tool, the markets only give a 65% chance that the Fed will raise interest rates by another 25 bps later this month. A week ago, the markets thought there was a 30% chance of a 50-bps rate hike later this month and a 100% chance of at least a 25-bps rate hike.

Then, the money markets only see a small 32% chance of another 25 bps rate hike in May, which would bring rates to 5.0-5.25%. Money markets now expect that by the end of 2023, US interest rates will have fallen back to around or just below 4%. Last week at this time, the prices were more focused on rates ending the year in the mid-5.0% range.

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The big change in how much people think the Fed will tighten has caused US bond yields to drop. The 2-year bond yield is back to around 4% after being around 5% just a few days ago. The US dollar is under pressure, which makes sense. As the price of crypto has shown over the past two days, this massive loosening of financial conditions by the US government to avoid a financial crisis is a huge bullish sign.

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