Institutional investors pull back from crypto amid regulatory crackdown

In the aftermath of the regulatory crackdown in the United States, institutional investors may have gotten the jitters on cryptocurrency. As a result, digital asset investment products had the highest weekly outflow of any asset class in 2023.

The institutional cryptocurrency fund management CoinShares said on February 20 that digital asset investment products suffered withdrawals of $32 million last week, the greatest outflow of the year. This was the largest outflow since the beginning of the year.

The outflow follows a massive crackdown on the digital asset industry in the United States, which has targeted everything from staking services to stablecoins to crypto custody as the Securities and Exchange Commission ramps up what industry analysts have dubbed its "war on crypto." The SEC has targeted everything from staking services to stablecoins to crypto custody as it ramps up what they have dubbed their "war on crypto."

According to CoinShares analyst James Butterfill, outflows peaked at $62 million halfway through the previous week, but they dropped down by the end of the week as sentiment recovered.

The vast bulk of these withdrawals, or 78%, were made from investment instruments connected to Bitcoin (BTC), while Bitcoin short funds received an infusion of $3.7 million during this time period. The company placed responsibility for the increasing outflows on the heightened scrutiny from regulators.

We think that this is because investors in ETPs have a more pessimistic outlook on recent regulatory pressures in the United States in comparison to investors in the wider market.

Despite this, the general market had a gain of 10% over the time period in question, which was not reflective of the pessimistic outlook expressed by institutional investors. Butterfill said that as a result of this, the total assets under management for institutional products reached $30 million, which is the highest level since August.

However, blockchain equities reversed the trend with inflows that totaled $9.6 million for the week. Ethereum (ETH) and mixed-asset funds also saw withdrawals of capital over the same time period.

In the month of January, institutional investors resumed their practice of investing in cryptocurrency funds, with total inflows of $117 million for the last week of the month, marking a new record for the past six months.

Nevertheless, there has been a withdrawal from funds during the last two weeks, after a period of four weeks in January when there were deposits.

The change in attitude might be attributed to a regulatory enforcement action that occurred on February 9, when the SEC brought charges against Kraken for the staking services it provided. A few days later, it filed a lawsuit against Paxos about the minting of Binance USD (BUSD), and only the week before that, it suggested reforms that would affect cryptocurrency companies that operate as custodians.