Crypto ETFs get first major test after $370 billion market sell-off

Bitcoin and ether are gaining back ground after falling to their lowest level in six months on Monday in the first major test of the recently launched crypto exchange-traded funds.

As of early Monday, roughly $370 billion had been wiped off the market cap of all digital tokens over a 24-hour period, with bitcoin plummeting below $50,000 and ether notching its largest single-day drop in three years.

Much of the sell-off was tied to a broader market rout as stocks sank across the globe. What is different for crypto this time around from prior sell-offs is that many more investors are vulnerable due to the newly launched spot crypto ETFs.

Bitcoin ETFs started trading in January, followed by ether funds last month. For many investors, it is their first exposure to crypto and the volatility that comes with it. Net flow data from crypto data firm CoinGlass shows that, for the most part, ETF holders stayed in the game. 

Across all spot bitcoin ETFs, there were net outflows of around $169 million. Notably, the popular IBIT fund issued by BlackRock did not see any redemptions, and Monday’s outflows are a fraction of the more than $50 billion market cap of the funds.

JPMorgan Chase analysts wrote in a note that spot bitcoin ETF volumes more than doubled on Monday to more than $5.2 billion from Friday. The bank added that trading volume eclipsed the debut in January.

Within spot ether ETFs, more than $49 million was added across all the funds, and JPMorgan analysts added that trading volumes had “noticeably rebounded.”

Digital asset analysts at Bernstein said in a note on Aug. 5 that unlike previous cycles when it was harder to invest in bitcoin through crypto exchanges, bitcoin ETFs are live and “highly liquid,” trading around $2 billion a day.

“We expect more wirehouse approvals into Q3 and Q4, thus providing further on-ramps for asset allocation to Bitcoin,” they wrote.

Beginning Wednesday, Morgan Stanley will allow its army of 15,000 financial advisors to pitch spot bitcoin ETFs issued by BlackRock and Fidelity to clients who meet certain criteria, including having a net worth north of $1.5 million, CNBC has learned.

To this point, wealth management businesses on Wall Street were only facilitating trades if customers specifically requested exposure to new spot crypto funds. Morgan Stanley is the first major player to permit advisors to actively recommend a bitcoin allocation to clients.

Others will likely follow due to pent-up demand.

Bitcoin’s most recent bull run has directly coincided with tens of billions of dollars flowing into the new spot crypto funds. It is a number that could increase dramatically when more financial advisors get involved.

“You have a lot of firms that are in a wait-and-see mode,” Franklin Templeton CEO Jenny Johnson told CNBC in May. “So you haven’t even gotten that second wave. This is really the first wave of the early adopters.”

Franklin Templeton issues spot ETFs for both bitcoin and ether.

“I think the next wave is the much bigger institutions to get more comfortable with how it’s settled out,” Johnson said.

But as bitcoin becomes more of a liquid macro asset, Bernstein analysts expect crypto to trade largely off “macro and election cues” for most of the third quarter.

“If broader equity markets recover, on the back of a Fed response, we would expect Bitcoin and crypto markets to follow,” they wrote.

Analysts with Barclays also noted on Monday that trading volumes across ETF products are still dwarfed by the volumes on crypto exchanges.