Bitcoin drops near $58K as ETF outflows surge, downside risks persist

• Bitcoin ETFs selling intensified, with a 34,267 BTC five-day net outflow last week, the second-largest on record.
• K33 noted that in several past instances, Bitcoin's underperformance relative to the S&P 500 was followed by stronger ETF inflows.
• Wintermute said Bitcoin has entered an advanced bear market phase, but may fail to bottom in summer months due to thin liquidity.

Bitcoin (BTC) could see a short-term relief from heavy selling pressure as quarter-end portfolio rebalancing could potentially revive spot BTC exchange-traded funds (ETFs) inflows, according to a K33 report on Tuesday.

The firm stated that aggressive ETF selling has become one of the biggest drivers of Bitcoin's recent weakness, noting that five-day net ETF flows plunged to -34,267 BTC last week, marking the second-largest five-day outflow on record.

Bitcoin ETF selling pressure could ease due to quarter-end rebalancing

Despite the outflows, the firm noted that quarter-end portfolio rebalancing could offer temporary relief in the coming weeks.

"As we await the end of yet another quarter of significant BTC underperformance, rebalancing may once again push flows from negative to positive over the coming week," K33's Head of Research Vetle Lunde wrote.

The firm stated that in nine of the past 18 months, ETF flows diverged from the prevailing trend for the rest of the month during the six trading days around month-end.

In several instances, periods when Bitcoin underperformed the S&P 500 were followed by stronger ETF inflows as investors increased their Bitcoin exposure during portfolio rebalancing.

However, K33 cautioned that the relationship has not been consistent enough to be viewed as a reliable market signal. The firm stated that the other nine months failed to follow the same pattern, indicating that rebalancing is only one of several factors influencing ETF demand.

"If this relationship persists, quarter-end rebalancing could provide a well-needed relief for Bitcoin during the first few trading days of July," the report said.

K33 also examined recent changes at Strategy, saying the company's expanded liquidity reserve reduces immediate concerns about forced Bitcoin sales while introducing a new source of uncertainty.

The report noted that Strategy increased its USD reserve to $2.55 billion, extending preferred dividend coverage from roughly 10 months to more than 17 months.

The company also established a Bitcoin Monetization Program, allowing it to sell up to $1.25 billion in Bitcoin to fund obligations and share repurchases.

"The possibility of BTC sales from its 847,363 BTC holdings remains a risk to market sentiment, particularly if investors continue to worry about a potential doom loop in which Strategy ultimately suspends dividends on its preferred securities,” K33 added.

Wintermute suggests downside could persist before a market bottom

Wintermute analysts shared a similar sentiment in a report made public on Tuesday, arguing that although several indicators point to an advanced stage of Bitcoin's bear market, a definitive bottom has yet to form.

Wintermute pointed to deeply depressed sentiment, with the Crypto Fear & Greed Index remaining in extreme fear territory and an increasing share of Bitcoin's circulating supply now being held at a loss.

The firm also viewed Strategy's newly announced capital framework as reducing the risk of a disorderly unwind while underscoring the current market environment.

"A Bitcoin treasury company now reserving the right to sell Bitcoin to cover its dividends tells you something about where we are in the cycle," Wintermute wrote.

Wintermute analysts noted that Bitcoin has historically not bottomed during the summer months, as thin trading volumes limit meaningful accumulation.

The firm expects further downside into September or October before a potential recovery, depending on macroeconomic conditions.

Bitcoin is trading at $58,690, down 2% over the past 24 hours at the time of writing.