Is This 1 Huge Tailwind for Bitcoin Becoming a Headwind?

Tailwinds for investments aren't guaranteed to last a long time. Sometimes, the breeze can change directions, and the drivers that used to be responsible for higher prices can become what's keeping them in doldrums or declining.

In that vein, Bitcoin (CRYPTO: BTC) could be suffering from this exact phenomenon, where it benefited from a certain money flow for a long time, only for that flow to reverse direction. So is this former tailwind going to end up being a persistent headwind from here on out?

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Know the details

As you probably already know, Bitcoin exchange-traded funds (ETFs) let investors buy exposure to Bitcoin via brokerage and retirement accounts, and the fund's "flows" track net money entering or leaving those investment vehicles. Since Jan. 27, more than $1.3 billion in capital flowed out of Bitcoin ETFs.

Most daily trading in an ETF happens between investors in the market, without forcing the fund itself to buy or sell anything. The buying and selling that changes the ETF's underlying Bitcoin holdings happens through the creation and redemption process, which is handled by large financial intermediaries (the asset issuers) that swap lots of ETF shares for the underlying asset or cash.

For the record, the price of Bitcoin is down more than 20% since Jan. 27, so it's safe to say that investors have been reducing their exposure. Outflows can be both a cause and an effect during risk-off periods; falling prices trigger investor risk reduction, and this can then add to spot selling pressure.

So, the ETF tailwind has indeed become a headwind, at least for the moment.

This headwind is more about marginal buyers than doom

If the weekly outflows continue, the consequence will be that fewer marginal buyers will show up to purchase ETFs right when Bitcoin needs steady demand to absorb natural selling.

That could amplify volatility, but it still isn't significantly different from a normal sell off. Given that terrible market sentiment and forced liquidations of highly leveraged trades have largely been responsible for the coin's poor performance recently, there still isn't any evidence that its investment thesis is compromised in any way.

With that in mind, the ETF outflows aren't anything to lose sleep over. When sentiment improves, inflows will almost certainly return. This isn't the time to sell your Bitcoin.

If your time horizon for holding it is long enough, and if your risk tolerance for holding it through further downside is high enough, it's actually a decent time to buy.

Remember: Price often precedes narrative in crypto, and Bitcoin is the asset that originally defined that paradigm. If you let ETF outflows scare you out of your position, you won't catch the rebound when it eventually happens.

Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.