Blackrock ETF Demonstrates How Institutional Products Improve Crypto’s Stability

Global stock markets saw a rapid decline in the first week of August as the Bank of Japan raised rates a modest 15 basis points with many U.S. firms selling off Japanese equities amidst mounting concerns for the carry trade – borrowing at low rates to fund investments. The Japanese stock market, the Nikkei 225, plunged more than 12 percent to levels not seen since Black Monday in 1987.

The panic sparked a sell off US stocks on all major indices of more that 2.5 percent and crypto followed with bitcoin falling 17 percent to below $50,0000. With highly correlated markets, bitcoin’s status as “digital gold” was questioned, as gold recorded a 1 percent drop over the period. Losses in most U.S. and crypto markets were pared within 24 hours and back to previous levels by the end of the week.

Investors of the iShares Bitcoin Trust Fund (IBIT), Blackrock’s $19 billion spot bitcoin ETF, endured the dip. Data from Farside Investors reported that IBIT did not see outflows, even on August 5, when BTC’s price dropped, and saw greater inflows within two days. Notably, other spot BTC ETFs, with the exception GBTC, also fared well, achieving net positive inflows in less than two weeks from the short lived flash crash.

These recent flows highlight how institutional products like ETFs have a degree of built-in stability, which can reduce bitcoin volatility, and signal more of a longer-term investment strategy.

As Shibtoshi, the CEO of SquidGrow, a platform advancing private cross-chain aggregators such as SilentSwap, notes, “ETFs carry inherent risks, including the potential for excessive asset consolidation, which can undermine decentralization, along with other issues typically associated with centralized products. However, their performance during the recent market correction highlights that those who invest in (crypto) ETFs exhibit a level of resilience that is crucial for the maturation of cryptocurrency markets.”

Shibtoshi also attributes this resilience to the nature of the investors predominantly involved in ETFs. Unlike speculative traders or newcomers, many are more seasoned investors that bring decades of experience navigating volatile market conditions. Their approach to trading and investment is characterized by rational decision-making and a focus on long-term strategies, rather short-term strategies, or emotions.

Bitcoin’s Decreasing Volatility

The role of Ethereum ETFs in catalyzing institutional adoption is also now also garnering market attention, but with many of the same principles and insights that apply to BTC ETFs, mainly centering on mainstream investors who shy away from volatile investments. Bitcoin’s average volatility has been around 46 percent over the past decade, and has dropped to roughly 35 percent over the past year, a significant decrease, but still significantly above major US equities.

According to Serhii Kravchenko, the CEO of DeXe, an AI launchpad for creating and governing DAOs and Memecoins, with a TVL of over $480 million, “While bitcoin is still a risk-on asset, it’s increasingly getting at par with mainstream instruments like tech stocks. Spot ETFs and the institutional adoption they bring are some of the key enabling factors in this regard.”

Adding another dimension to this trend, Pontem Network CEO Alejo Pinto emphasized that institutional products and adoption initiate a positive feedback loop, “On the one hand, more institutional demand raises the overall quality standard for builders and projects to meet. In this sense they bring positive competition into the market. On the other hand, more decentralized crypto-native products emerge to offset the rise of centralized institutional products and instruments, making the industry more versatile as a whole.”

The demand for ETFs is underpinning the case for crypto, despite ongoing price fluctuations. ETF holders are raising the industry’s time preference, which can serve as a key metric to instill confidence in those who are still waiting on the sideline. Moreover, it acts as a strong counter argument for anti-crypto policymakers and regulators who tend to undermine crypto as a merely speculative, casino-type asset class.

More Support From The Outside

Like bitcoin and Ether, AI ETFs have also evolved steadily for the past year. According to data from ETF Central, the aggregated value of 13 AI ETFs has surged 10.37 percent YTD and 25.46 percent since August 2023. Their current AUM is $2.91 billion, with roughly $1.6 billion in daily positive inflows.

Owlto Finance Co-founder, Krystal Zhang, argues that the parallel rise of AI ETFs is a big macro development for crypto and blockchain stating, “Spot BTC and ETH ETFs have brought lots of mainstream attention to the industry. To capitalize on this influx fully, it’s important to deliver a frictionless, scalable, and intuitive UX, so that incoming Web2 users get what they expect. Leveraging AI advancements with cutting-edge blockchain innovation is the way to achieve this much-needed UX boost.”

While there have been many mostly futile AI versus Crypto debates in the past, there’s a growing consensus regarding the mutually beneficial nature of these technolgoies. Crypto and blockchain projects are implementing AI for more functionality and efficiency, especially around access and analytics. Owlto Finance is a platform that enables users to transfer assets across more than 45 blockchains with over 2 million users in over 200 countries and regions, a great GenAI Small Language Model (SML) use case.

Rock Zhang, the Founder of the DePIN-EdgeAI synergy project Network3, which recently launched its physical dual mining machine N3 Edge V1, weighed in on this topic. As he sees it, using blockchain and cryptography to decentralize AI computations, data storage, etc., could play an important role in extricating AI, a potentially world-changing technology, from Big Tech’s seeming dominance and control.

Says Zhang, “Like blockchain and crypto, AI is a tool for community empowerment. They must come together for the potential of decentralized intelligence, which is crucial as we move toward a more interconnected and data-driven world. By processing data closer to the source, Edge AI not only accelerates decision-making but also enhances security and efficiency.”

Crypto ETFs have presented themselves as a force that is taking cryptoassets mainstream, and driving greater mainstream adoption. Many current projects are working their way to tapping into this development and it’s likely that we will see more to come. It’s also important that innovators and industry stakeholders keep up a justifiably adversarial outlook and not let the frenzy and hype get in the way, especially with GenAI.

The future lies in more and greater network projects deploying this relatively nascent and quickly maturing technology to demonstrate its use case, and that is has a job to do in markets, industries, sectors, and for society. It’s a rather exciting time for digital industries, especially financial services.