- Bitcoin ETFs are absorbing liquidity, reducing capital rotation into altcoins, and weakening the traditional altcoin season cycle.
- Institutional investors prefer Bitcoin ETFs, keeping funds in traditional markets instead of reinvesting in altcoins.
Bitcoin ETFs are reshaping the cryptocurrency market, altering the traditional capital flow that once fueled altcoin season. Crypto analyst Miles Deutscher suggests that the wealth effect—where Bitcoin holders reinvest profits into altcoins—is weakening. Institutional investors, who now hold Bitcoin through ETFs, are not cycling funds back into the crypto ecosystem.
The Bitcoin ETFs, although very bullish for $BTC, are actually one of the reasons why we haven't seen a 2021-esque altcoin season.
The same wealth effect which drove BTC holders into altcoins doesn't exist anymore.
Full explanation below. pic.twitter.com/BAeEOIvryY
— Miles Deutscher (@milesdeutscher) February 12, 2025
Data from Glassnode shows a sharp decline in altcoin market capitalization, with $234 billion wiped out in just two weeks. As Bitcoin ETFs attract more capital, liquidity for altcoin speculation is diminishing.
ETF Influence on Capital Rotation
Historically, Bitcoin’s four-year halving cycle led to significant profit-taking, with capital flowing from BTC into Ethereum, large-cap altcoins, and smaller tokens. However, Deutscher notes that the introduction of spot Bitcoin ETFs has disrupted this cycle. Unlike traditional Bitcoin holders who kept assets on exchanges, ETF investors hold BTC through financial institutions, with settlements in U.S. dollars instead of crypto.
The Bitcoin ETFs, although very bullish for $BTC, are actually one of the reasons why we haven't seen a 2021-esque altcoin season.
The same wealth effect which drove BTC holders into altcoins doesn't exist anymore.
Full explanation below. pic.twitter.com/BAeEOIvryY
— Miles Deutscher (@milesdeutscher) February 12, 2025
This shift means less capital remains within the crypto market, reducing liquidity for altcoins. Many investors now allocate funds to traditional markets like the S&P 500 instead of rotating into Ethereum or Solana. Glassnode data reinforces this trend, showing a steep decline in altcoin valuations, marking one of the most significant market downturns in recent years.
Institutional Investment Weakens Liquidity
A major difference in this cycle is the behavior of ETF investors compared to traditional crypto whales. Deutscher explains that whales previously reinvested profits into altcoins, increasing their risk exposure during bullish phases. In contrast, Bitcoin ETF holders lack direct access to altcoins and trade BTC against fiat, not other cryptocurrencies.
This behavior significantly impacts market liquidity, limiting the conditions necessary for an altcoin season. Glassnode data shows Bitcoin investors have realized $520 million in losses, a substantial figure but still below the $1.3 billion recorded in August 2023 during the yen-carry trade unwind. Meanwhile, the altcoin market has suffered a $234 billion drawdown, underscoring the weakened investor appetite for riskier assets.
The #altcoin market cap has declined by $234B over the last two weeks, marking one of the largest absolute drawdowns in recent history. This broad-based capitulation highlights continued weakness across the sector, with few assets managing to hold ground: https://t.co/AGs05RdiXs pic.twitter.com/oxxKzGDDHb
— glassnode (@glassnode) February 12, 2025
Goldman Sachs Expands Bitcoin ETF Holdings
Institutional interest in Bitcoin ETFs continues to rise. As discussed in the previous post, Goldman Sachs is increasing its holdings to $2.3 billion, according to 13F filings. The bank added $710 million in the last quarter, primarily investing in iShares Bitcoin Trust and Fidelity’s Bitcoin Fund. Regulatory constraints prevent direct Bitcoin ownership, making ETFs a preferred vehicle for exposure.
As reported by CNF, U.S. Bitcoin ETF products attracted over $5 billion in inflows in January alone, reflecting growing demand among traditional investors. Bitwise CIO Matt Hougan predicts that total inflows could reach $50 billion, reinforcing Bitcoin’s dominance over altcoins.
