Bitcoin ETF Demand Turns Lower AgainAlso The Recovery Timeline May Be Longer Than Investors Expect & The Fed Still Sees Inflation As The Bigger Risk
Welcome to Ecoinometrics’ Friday edition. Each week, we analyze the three most critical market signals impacting Bitcoin and macro assets, delivering institutional-grade insights through data-driven charts and analysis. Today we’ll cover:
Bitcoin’s recovery is being tested. This week brought weaker ETF demand and a Federal Reserve that remains deeply concerned by inflation (and rightly so). Today we’ll look at how those developments fit together and what they tell us about the current state of the market. In case you missed it, here are the other topics we covered this week:
Get these professional-grade insights delivered to your inbox: Bitcoin ETF Demand Turns Lower AgainA week ago, Bitcoin’s recovery was already under pressure. This weak is bringing more weakness. Bitcoin’s price has held up reasonably well, but the demand trend underneath the market has continued to deteriorate. Following a week of heavy ETF outflows, the recovery in institutional demand has more than stalled. The chart below shows the drawdown in cumulative Bitcoin ETF holdings since October (compared to previous drawdowns). Just a few weeks ago, ETF demand was on track to fully recover from that drawdown. Instead, this week’s outflows pushed holdings back into decline and erased a meaningful portion of that progress. Given that ETF demand has been the main driver of Bitcoin’s recovery, that’s a bad signal. When flows were improving, the market had a strong source of support underneath prices. That support is gone. The surprising part is that Bitcoin’s price has not reacted much yet. Based on our ETF flows-to-return model we actually expect price to decline even more (see here). But historically, changes in demand tend to show up in the flow data before they show up in price. And right now the flow trend is moving in the direction of our bearish scenario analysis for May. With rolling 30-day flows now back in negative territory, caution is warranted until demand stabilizes.
The Recovery Timeline May Be Longer Than Investors ExpectThere are plenty of theories for why Bitcoin’s demand has weakened recently. Some are technical. After a strong rebound, it is normal to see buying pressure fade as traders take profits and positioning resets. Especially when you reach resistance at the 200-day moving average level. Others are macroeconomic. Rising inflation concerns have pushed yields higher and made investors more selective about taking risk. We discussed that dynamic in more detail on Monday. But it is important not to confuse a setback with the end of the recovery process. The current cycle is still one of the larger drawdowns Bitcoin has experienced over the last decade. And historically, recoveries from drawdowns of this size tend to take much longer than most investors expect. The chart below compares the depth of past Bitcoin drawdowns with the time it took for those drawdowns to fully recover. The relationship is easy to read: deeper drawdowns tend to last longer. Based on the historical pattern, a drawdown of the current magnitude would typically take around 10 months to fully work itself out, give or take a few months. We are roughly 8 months into that process. That’s worth keeping in mind because the recovery phase is rarely a straight line. The initial rebound often happens quickly at the bottom, but the final stages usually involve periods of consolidation, setbacks, and renewed doubts about the trend. The good news is that broader market conditions have improved meaningfully since the lows. As we showed on Wednesday, risk appetite is stronger today than it was just a few months ago. That does not guarantee a smooth recovery from here. But history suggests investors should be prepared for a recovery still measured in months rather than weeks.
The Fed Still Sees Inflation As The Bigger RiskThis week the Federal Reserve released the minutes from its April meeting. There were very few surprises, but the document reinforced an important message for investors: inflation remains the Fed’s primary concern. Reading through the minutes, three points stand out. First, policymakers remain worried that inflation could take longer than expected to return to their 2% target. Higher energy prices, supply chain disruptions, and tariff-related price pressures were all cited as reasons inflation risks remain elevated. Second, many participants indicated that interest rates may need to stay at current levels for longer than previously expected. The Fed does not appear to be in a hurry to provide additional support to markets. Third, several policymakers acknowledged that further policy tightening could become necessary if inflation remains stubbornly high. That’s not the Fed’s base case today, but it is a reminder that rate hikes have not disappeared from the conversation. Our Fed Communication Index which systematically rank the Fed meetings on a dovish to hawkish scale, reaches a similar conclusion. The latest meeting scores as moderately hawkish. That’s well below the peak tightening period of 2023–2024, but still firmly on the hawkish side of the scale and comparable to levels seen in 2018. That comparison is useful because 2018 was one of the last periods when the Fed continued tightening policy despite growing market concerns. Back then U.S. stock indices experienced a 25% correction before the Fed decided to back down. Today we are not in the same situation, but the lesson is similar: as long as inflation remains the Fed’s biggest concern, there is a limit to how supportive monetary policy can be for risk assets such as Bitcoin. And the risk of tightening is ever present.
Tactical TakeawayThe situation calls for caution. Bitcoin’s recovery is not dead, but it has lost one of its most important sources of support. ETF demand has weakened sharply, and the Federal Reserve reminded everyone they are not going to provide any additional support to financial markets. The broad recovery trend is not dead. But with demand deteriorating we recommend to reduce exposure to Bitcoin right now. The key signal we are watching is ETF flows. A sustained return to positive 30-day flows would force us to reassess the current cautious stance. Conversely, continued outflows would strengthen the case that Bitcoin’s recovery is entering a more prolonged consolidation phase. That’s it for today. Thanks for reading. Cheers, Nick P.S. Every week, our team conducts extensive research analyzing market data, tracking emerging trends, and creating professional-grade charts and analysis. Our mission: Deliver actionable macro and Bitcoin insights that help institutional investors and financial advisors make better-informed decisions. Ready for institutional-grade research that puts you ahead of the market? Click below to access our premium insights. Invite your friends and earn rewards
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