As Bitcoin's price plummeted to its lowest point in two months, investors rushed to withdraw their funds from spot Bitcoin ETFs. The staggering outflow surpassed the previous record of $326 million in daily net outflows, which occurred in mid-March.

The surge in net outflows from Bitcoin funds coincided with the Federal Reserve's announcement that its battle with inflation is far from over. The central bank opted to keep interest rates fixed at their highest levels in over 23 years following its May policy meeting. Fed Chair Jerome Powell also stated that tighter monetary policy, which could negatively impact risk assets such as stocks and cryptocurrencies, was unlikely to be implemented in the near future. Despite reaching $58,500 after Powell's remarks, Bitcoin has still declined by 8% over the past week.

Notably, BlackRock's spot Bitcoin ETF, the iShare Bitcoin Trust (IBIT), experienced outflows for the first time since its inception. The ETF, which had accumulated an uninterrupted $15.4 billion in assets since its Wall Street launch, saw outflows of $37 million. Additionally, Fidelity's spot Bitcoin ETF led the surge in sell-offs, with $191 million leaving the fund, while Grayscale's Bitcoin Trust (GBTC) witnessed outflows of $167 million. GBTC, which transitioned to a spot ETF in January after a decade on the market, has already experienced cumulative outflows exceeding $17 billion since the beginning of this year.

The outflows from GBTC have primarily been linked to the bankruptcy estates of various crypto firms divesting their shares. Grayscale's management fee of 1.5% for GBTC also played a role, as investors sought cheaper alternatives with fees around 0.25%.

Experts have cautioned that spot Bitcoin ETFs have the potential to amplify market downturns. Analysts from crypto analytics firm Kaiko highlighted this in a report published in conjunction with Moody's on Wednesday. If a significant event were to trigger substantial outflows, ETF issuers would be required to liquidate their holdings, potentially undermining crypto market values.

As of mid-March, spot Bitcoin ETFs managed $63 billion in assets under management (AUM). However, due to Bitcoin's recent decline, the market value of their Bitcoin holdings (along with a small cash amount) has fallen by 19% to $51.4 billion.

Bloomberg Senior ETF Analyst Eric Balchunas noted that Wednesday's net outflows, which accounted for 1% of spot Bitcoin ETFs' AUM, were deemed normal for a risk asset ETF during a market selloff. However, he warned that if Bitcoin's correction worsens, ETF AUM could potentially drop by 10%.

Despite the substantial outflows, the price of Bitcoin remains up 33% year-to-date, partially attributed to the supply and demand dynamics facilitated by spot Bitcoin ETFs. Pseudonymous crypto trader WhalePanda reiterated this, stating that the outflows were to be expected in times of panic.

Disclaimer: The views and opinions expressed in this article are for informational purposes only and do not constitute financial, investment, or other advice.