Fed's monetary policy hits crypto funds: Record outflows of $415 million

According to the latest report from Coinshares, the Fed and the CPI have put the brakes on the rise of cryptocurrency investment funds this week. 

The historic streak of inflows into crypto-asset-based investment funds has been broken following statements by Jerome Powell, chairman of the United States Federal Reserve (Fed). 

Until a few weeks ago, cryptocurrency investment funds had been experiencing an unprecedented boom. In fact, since the US presidential election that took place in November 2024, these financial products had attracted more than $29.400 billion. According to Coinshares, inflows in 19 consecutive weeks since the election far exceeded the $16.000 billion recorded in the first 19 weeks after the launch of Bitcoin spot ETFs in January 2024. 

However, this impressive positive streak changed dramatically when statements by the Chairman of the Federal Reserve and the publication of a Consumer Price Index (CPI) higher than expected generated an unexpected reaction in the markets.

Investors, particularly sensitive to monetary policy signals, began to withdraw their investments from cryptocurrency-based funds. According to CoinShares’ weekly report, in the week ending February 17, outflows totaled $415 million, with Bitcoin being the most affected digital asset, with outflows reaching $430 million. This reversal marked the end of a historic streak of investment growth in the crypto market. 

What drove the reversal of inflows into crypto funds?

In her report In a weekly report, Coinshares noted that the combination of more aggressive rhetoric from the Fed and rising inflation has created an uncertain environment for investors, who are now looking to protect their investments against the possibility that interest rates will remain high for longer than expected. This scenario has impacted cryptocurrency funds, posing significant challenges for global financial markets in general.

The run of inflows into crypto funds had been intact for months, supported by a relatively benign monetary policy environment and growing institutional interest in digital assets. However, Jerome Powell’s statements and the rise in the CPI have reversed this trend. 

Powell, during his appearance before Congress, made it clear that the Fed's monetary policy would be more restrictive than initially expected. This translated into a clear message for investors: interest rates would not be lowered in the near term, which directly affected assets such as Bitcoin, which are highly sensitive to monetary policy expectations. On the other hand, the January CPI exceeded expectations, suggesting that inflation would remain a challenge in the short term.

“We believe these outflows were triggered by Congress meeting with Fed Chairman Jerome Powell, who signaled a more aggressive monetary policy stance, along with better-than-expected US inflation data.”, said James Butterfill of Coinshares. 

In addition, seasonal price adjustments by businesses and early consumer purchases ahead of expected tariffs also played a major role in the spike in inflation. These factors, coupled with the Fed’s cautious stance, created a scenario where investors chose to reduce their exposure to riskier assets, such as cryptocurrencies.

The impact on Bitcoin and other digital assets

Bitcoin, historically sensitive to fluctuations in interest rates and monetary policy, was the asset most affected by the reversal in flows. In the week of February 17, Bitcoin-based funds saw outflows of $430 million, which was the largest weekly outflow this year.

However, not all cryptocurrencies were equally affected. While Bitcoin suffered an exodus of investors, assets such as Solana, XRP, and Sui Network saw significant inflows. Solana, for example, attracted $8,9 million, while XRP and Sui added $8,5 million and $6 million, respectively. Additionally, blockchain equity products also saw inflows of $20,8 million, bringing the total inflows so far this year to $220 million.

This contrast suggests that investors are diversifying their bets within the broader cryptocurrency ecosystem, seeking opportunities in more specific niches, such as the underlying blockchain technology or emerging projects.

What do these exits mean for the future of the crypto market?

The reversal of flows into crypto funds does not necessarily mean the end of the digital asset boom, but it does suggest that investors are adopting a more cautious attitude. In an environment of high interest rates and growing economic uncertainty, risk assets, including cryptocurrencies, may face greater challenges.

However, it is important to note that outflows have not been uniform. While Bitcoin-based funds have lost capital, other assets and sectors within the cryptocurrency ecosystem continue to attract investment. This indicates that, although general enthusiasm may have waned, diversification and innovation remain key factors in the appeal of digital assets.

Investing in cryptoassets is not fully regulated, may not be suitable for retail investors due to high volatility and there is a risk of losing all invested amounts.