Crypto Funds Hit by Redemptions as Investors Retreat From Bitcoin

Crypto Funds Hit by Redemptions as Investors Retreat From Bitcoin

Investors pulled some $50 million from cryptocurrency funds last week, the first net redemptions of the year, as bitcoin’s (BTC) price tumbled.

According to a report Monday by CoinShares, outflows from bitcoin-focused funds totaled a record $98 million in the seven days through May 14, while investment products focused on other digital assets continued to pull in new money.

The net amount still represents a small fraction of the $5.6 billion put into cryptocurrency funds this year, but the outflows show how quickly some investors were to retreat as bitcoin began a price pullback that has now extended to as much as 35% from April’s all-time high.

Related: Market Wrap: Elon Taketh Away – Bitcoin Continues Fall as Options Traders Pile Into Puts

“Investors have been diversifying out of bitcoin and into altcoin investment products,” according to CoinShares.

Investor demand for investment products focused on ether (ETH) continued to rise, totaling $27 million last week.

May marks the first month there has been more investment product trading volumes in ether relative to bitcoin.

Digital asset investment products focused on ether traded a total of $4.1 billion for the week, versus bitcoin’s $3.1 billion.

“We also saw inflows into other digital assets, the most popular being cardano (ADA) and polkadot (DOT), with inflows of $6 million and $3.3 million, respectively.”

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Why Crypto Stocks Dropped Like Rocks Today

What happened

The world of cryptocurrencies was thrown for a loop over the weekend as Elon Musk suddenly soured on the industry. That’s caused a big drop in cryptocurrencies like Bitcoin (CRYPTO:BTC), Ethereum (CRYPTO:ETH), and Dogecoin (CRYPTO:DOGE). As I’m writing, Bitcoin is down 9.2% in the last 24 hours, Ethereum is down 9.8%, and Dogecoin is down 7.4%. That puts their loss for the week at 26.4%, 17.1%, and 15.7% respectively.

When an underlying currency or commodity, like cryptocurrency, falls it’s no surprise that holders of the asset and producers, known as miners, drop as well. Today, some of the biggest losers are CleanSpark (NASDAQ:CLSK) with a 10.7% drop, Riot Blockchain (NASDAQ:RIOT) with a loss of 13.5%, Grayscale Bitcoin Trust (OTC:GBTC), which dropped as much as 14.4%, and Marathon Digital Holdings (NASDAQ:MARA), which lost as much as 12% of its value. At 2:30 p.m. EDT the stocks were down 9.3%, 10.4%, 13.4%, and 8.9% respectively.

So what

The drop in cryptocurrencies today was driven by Elon Musk’s comments over the weekend about Dogecoin and Bitcoin. Last week, Musk said that Tesla (NASDAQ:TSLA) will stop taking Bitcoin as payment for vehicles and yesterday he indicated that Tesla could sell all of its Bitcoin. He did clarify that Tesla hasn’t sold its Bitcoin yet, but certainly left the door open to selling in the future.

For a trust like Grayscale, the drop in the stock is understandable because it’s directly related to the drop in crypto asset prices. But for miners, the issue could be even worse.

Like a traditional mining company, Bitcoin miners have costs that go into generating Bitcoin and that cost is relatively fixed. So, when the price of crypto assets drops it has a magnified effect on the bottom line for these companies. In that respect, it’s surprising crypto mining stocks haven’t fallen further today.

Now what

Investors who buy crypto trusts or miners need to know that they’re getting a volatile asset. When cryptocurrencies are going up that can work out well, but we’re seeing just how quickly the market can reverse course.

The fact that all of this is happening because of a few tweets from Elon Musk is equally concerning long-term. There’s very little foundation that cryptocurrencies have to fall back on and they could collapse to pre-pandemic levels with very little notice. And that could put Bitcoin miners out of business.

Given the momentum and volatility, this simply isn’t a world of assets I’m going to jump into now. Cryptocurrencies may have a future in financial transactions, but right now it’s a speculative area and that’s not where I’m putting my money today.