Do Bitcoin ETF Flows Really Predict Future Bitcoin Price Moves? This New Research Has Important Implications for BTC Investors.

Investing is inherently rooted in statistics. Fortunately, not the complex high school math kind of statistics. More like conversational, back-of-a-baseball-card type of statistics.

The emphasis on stats is prevalent in the world of exchange-traded funds (ETFs), where market participants of all stripes intently follow fund flows, also known as inflows and outflows. That's certainly been the case with the iShares Bitcoin Trust ETF (NASDAQ: IBIT) and the other spot Bitcoin (CRYPTO: BTC) ETFs that debuted nearly three years ago.

Bitcoin ETF flows aren't price predictors, according to a new study. Image source: Getty Images.

In theory, comings and goings involving the iShares ETF, the largest fund in the category, should be instructive about the largest cryptocurrency's upcoming price action. However, a new study reveals that those data points aren't as predictive as investors hope.

Why Bitcoin ETF flows fall short

Every investor would like to have a (legal) edge of some kind. Still, a new study by DWF Labs confirms Bitcoin ETF flows aren't fortune-telling tools for a simple reason: Many investors make the quintessential mistake of performance chasing. In other words, they're reacting to what's already occurred, not what's upcoming.

The study notes that Bitcoin investors tend to exit spot ETFs following large declines and return to the funds after large rallies. That's called buying high and selling low when the better course of action is buying low and selling high. So, while the DWF Labs study notes some correlation between Bitcoin ETF flows and price, price moves first, and the flows/price relationship wanes within just a few days.

There are other reasons why Bitcoin ETF flows lack predictive power. Many crypto investors are HODLers, or devoted market participants, but the DWF study indicates those engaged with spot Bitcoin ETFs are jittery. Many sell these ETFs when Bitcoin slumps by just 7%. That's not even a correction, and it's nowhere near a bear market.

Arguably, the "weak stomachs" possessed by some ETF investors skew the potency of flows data because it's not unusual for Bitcoin to experience multiple declines of 7% (or more) over a few days or longer.

Investors' knack for selling Bitcoin ETFs at low prices merits deeper examination for a simple reason: sellers often do so at inopportune times. In five of the eight big sell-offs examined by DWF, the selling of spot Bitcoin ETFs intensified just days before a bottom was put in.

IBIT or others, it's basically the same

Don't bother wondering whether the iShares Bitcoin Trust ETF's status as the largest spot Bitcoin ETF implies that its flows deliver better signals than those of smaller rivals. Home to $68.7 billion in assets under management as of Friday, Oct. 23, iShares is more than quadruple the size of the next-largest fund in the category. Still, DWF comes right in and says the iShares fund "doesn't carry more signal" than its competitors.

In fact, the song is the same with the iShares ETF as it is with other Bitcoin funds: Inflows generally arrive after big rallies, not before them.

None of that is an indictment of Bitcoin ETFs, but the DWF study is a reminder that Bitcoin investors shouldn't put much stock in ETF flows.

Todd Shriber has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin and iShares Bitcoin Trust. The Motley Fool has a disclosure policy.