- Bitcoin and Ethereum ETFs may help reduce market volatility by bringing in more institutional investors with longer investment horizons and higher risk tolerance.
- ETF providers claim institutional investment helped offset sell-pressure during Monday’s market downturn, as investors saw it as a buying opportunity rather than panic-selling.
- While institutional investors provide more stable capital flows, their synchronized portfolio rebalancing could also lead to increased volatility during critical periods.
As crypto markets bounce back after a treacherous start to the week, exchange-traded fund (ETF) providers claim that the introduction of institutional investors may have helped calm volatility.
Institutional Investors Stabilize Markets
ETFs help dampen volatility by bringing more investors into the market, providing additional liquidity for buying and selling assets, according to Ryan Rasmussen, head of research at Bitcoin and Ethereum ETF provider Bitwise.
He noted that Monday saw Bitwise’s spot crypto ETPs draw in millions of dollars in net inflows, adding that the demand from investors was helping to offset sell-pressure.
In part, Rasmussen attributes this to ETF investors having more long-term mindsets, effectively looking to buy-and-hold over an extended period of time. With this mindset, as opposed to day traders or over-leveraged investors, many may see crashes in the market as buy opportunities rather than a moment for panic.
Patrick Pan, chairman and executive director at Hong Kong ETF custodian OSL, said this shift towards institutional investment has contributed to a more stable market.
Evidence of Stabilizing Effect
This stabilizing effect was in evidence with iShares Bitcoin Trust (IBIT), which saw net neutral flows despite the fund falling 14% over the weekend. Equally, US Ethereum ETFs posted their second-largest daily inflows since the funds were greenlit back in July.
The increased presence of institutional investors provides more stable capital flows into the market, mitigating the harm caused by crashes, Pan explained. He added that as more institutions enter the crypto market, it will likely become more mature and less volatile.
With a stable influx of capital into the market, top cryptocurrencies have bounced back, with Bitcoin and Ethereum up around 4% over the past 24 hours.
Concerns Remain
However, it’s not all sunshine and rainbows. OSL warned ETFs could lead to increased volatility during critical periods.
Pan said institutional investors have to adhere to strict risk management protocols, meaning that they often rebalance their portfolios at the end of the month, quarter or year. He explained that “These synchronized adjustments can cause significant market movements, particularly in the digital asset space where market depth may vary.”
Conclusion
While ETFs may help stabilize crypto markets overall, concerns remain about potential volatility from synchronized institutional trading. As more institutions enter the space, markets will likely continue maturing – but the road may be bumpy. For now, the influx of institutional money seems to be providing support during uncertain times.
