Bitcoin and Ethereum ETFs May Reduce Market Volatility, Providers Say

On Monday, global markets experienced extreme volatility with Bitcoin falling below $55,000, Ethereum slipping to $2,200, and over $1 billion worth of liquidations taking place. But exchange-traded fund (ETF) providers think the introduction of institutional investors may have calmed volatility.

“ETFs help dampen volatility by bringing more investors into the market, providing additional liquidity for buying and selling the asset,” Ryan Rasmussen, head of research at Bitcoin and Ethereum ETF provider Bitwise, told Decrypt.

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 strikes this up 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.

Institutional investors “typically have longer investment horizons, higher risk tolerance levels, and more planned investment decisions,” 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.”

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, U.S. 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.

But 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, noting that, “These synchronized adjustments can cause significant market movements, particularly in the digital asset space where market depth may vary.”