Institutional Selling Drains Liquidity as Bitcoin Enters First Institutional Bear Market

The Bitcoin market is experiencing its first institutional bear market, characterized by a decline in prices without the usual collapse of major institutions. The recent drop from $126,223 to below $59,000 and subsequent recovery to around $64,000 is a notable example of this phenomenon.

Unlike previous bear markets, which were often marked by the failure of major companies such as Terra, Three Arrows Capital, Celsius, Voyager, BlockFi, and FTX, the current market has seen no system-defining intermediary failures. The largest investment products, custodians, and market makers are functioning normally.

The shift to an institutional bear market can be seen in the behavior of spot Bitcoin ETFs, which have experienced significant outflows. Between June 3 and 24, these funds saw $4.21 billion of redemptions, with the average ETF holder's cost basis near $83,000. Citi has reported that $3.3 billion of net outflows occurred in the year through June, reducing its 12-month flow assumption from $10 billion of inflows to zero.

However, it is essential to note that these outflows do not directly translate to Bitcoin being dumped on exchanges. Some investors sell ETF shares to other investors, leaving the fund's holdings unchanged. When an authorized participant redeems shares, the fund may pay cash or hand over BTC that the participant can hold, hedge, or sell.