Crypto ETFs Shrink by Nearly $700M on Fed Rate Cut

Cryptocurrency exchange-traded funds are being swept up in the volatility that has engulfed financial markets since the Federal Reserve’s interest rate cut announcement earlier this week.

Spot bitcoin ETFs, which have gained more than 90% since getting regulatory approval on Jan. 10, suffered record outflows of $680 million on Thursday.

Bitcoin's price has rallied by more than 56% since the Nov. 5 presidential election, but at around $96,000 on Friday afternoon, the cryptocurrency is down about 10% from its Dec. 17 peak of more than $107,000.

For investors and financial advisors, the question will be whether the selloff is part of a longer-term pullback or just the latest reminder of the volatility that comes with crypto investing.

Crypto ETFs Sell Off

“The crypto selloff has been wild over the past 48 hours, and all major cryptocurrencies across the board saw sharp declines since Thursday,” said Said Israilov, founder of Israilov Financial in San Francisco.

“This massive selloff was triggered by the Fed's recent announcement of expectations of a slower pace of interest rate cuts in 2025,” he added. “Fed Chair Jerome Powell indicated two interest rate cuts in 2025 instead of the four they envisioned back in September.”

Ric Edelman, founder of the Digital Asset Council of Financial Professionals and a member of the etf.com advisory board, shrugged off the outflows to simple profit-taking and withdrawals to fund year-end charitable contributions.

“I expect a much larger wave of profit-taking after Jan. 10 because that’s when the ETF holders begin to convert their profits from short-term to long-term capital gains, radically cutting their tax liabilities,” he said. “The wave of selling will create a strong buying opportunity for new investors, and the cycle of price appreciation will then resume.”

Edelman, who believes bitcoin will crest the $150,000 mark next year, expects a “repeat of 2024 in 2025, with bitcoin ending next year at another huge, all-time high.”

Meanwhile, Noah Damsky, principal at Marina Wealth Advisors in Los Angeles, believes the wild price swings and asset flow patterns are part of what people should expect when investing in crypto ETFs.

“Quick sentiment shifts can swing crypto prices wildly,” he said. “In the absence of intrinsic value, emotion drives the price, and this is what concerns me.”

Damsky said crypto investing through ETFs is a classic example of emotional investing.

“The FOMO is real on the way up, but the ride down can be quick and steep” he said. “This recent price action further shows that, in terms of risk, crypto can be like kerosene on a fire when the stock market is volatile.”