Hedge funds have reduced their exposure to U.S. spot Bitcoin exchange-traded funds by 39% during the first quarter, as professional investors pulled back from the market amid a steep decline in Bitcoin prices. According to CoinShares report based on quarterly 13F filings, hedge funds cut their Bitcoin ETF holdings by 31,400 BTC during Q1, forming the largest portion of a broader institutional retreat. The reduction saw professional investors lower their combined exposure from 313,000 BTC to 261,000 BTC, a decline of 17%, with the value of Bitcoin ETF holdings reported by professional investors falling to $17.8 billion, down 35% from the previous quarter. Hedge funds and brokerages accounted for roughly 96% of the decline, with brokerages cutting another 18,800 BTC, representing a 53% decline from their previous positions, while investment advisors remained comparatively stable with only a 5.9% reduction.
The cryptocurrency ETF space experienced unprecedented outflows as U.S. spot Bitcoin ETFs recorded nearly $4 billion in net outflows between May 15 and June 2, with recent data from SoSoValue showing the sustained withdrawal trend. According to Citi's analysis, ETF flows account for roughly 45% of weekly fluctuations in Bitcoin returns, making them one of the most important gauges of investor sentiment. The bank's latest report confirms that BTC ETF withdrawals remain the largest source of pressure weighing on prices. Among the largest withdrawal days during that period were May 27 with $733.4 million, June 2 with $519.1 million, and June 1 with another $483.7 million leaving the funds. This represents a significant escalation from the previous $3 billion in outflows over ten days that had been dismissed as market noise by Bloomberg Intelligence's Eric Balchunas, with the $4 billion single-session outflow representing approximately 1% of the cumulative $50 billion in assets that US spot Bitcoin ETFs have accumulated since launching in January 2024.
Citi analyst Alex Saunders has confirmed that spot Bitcoin ETF flows explain roughly 45% of weekly BTC price moves, making them the best gauge of investor adoption and the clearest high-frequency measure of investor appetite. According to Citi's latest report, recent ETF flows have turned negative, highlighting a broader lack of investor demand for the cryptocurrency. The bank's analysis comes as Bitcoin was trading below $67,000 following sustained pressure from institutional selling. Citi emphasizes that digital asset treasury companies have emerged as important buyers of bitcoin, but the analyst does not believe treasury-related selling is a major factor behind recent weakness, instead pointing to ETF flows as the primary driver. An announcement of small digital asset treasury selling has had an outsized effect on BTC in our view but does not alter the fundamental backdrop, according to Citi analysts. The institutional pullback occurred alongside a sharp correction in Bitcoin, with the cryptocurrency losing 22% during the quarter and briefly falling below $60,000 after extending losses that began late last year.
While hedge funds and brokerages led the selling, banks moved in the opposite direction, adding approximately 7,800 BTC worth of Bitcoin ETF exposure during Q1, more than doubling their holdings from the previous quarter. According to CoinShares report, this strategic accumulation by financial institutions contrasts sharply with the broader institutional retreat. The sector's increased exposure comes as Bitcoin traded roughly 50% below its October 2025 record high above $126,000, representing a significant discount from peak levels. The share of total U.S. spot Bitcoin ETF assets held by 13F filers dropped from 24.7% to 20.8% during the quarter, reflecting the broader institutional shift away from cryptocurrency investments toward alternative assets. This trend continues as dampened hopes for an improved macroeconomic environment prompt institutions to withdraw funds from crypto ETFs and move to other assets, such as AI-related stocks.
The chances of a U.S. crypto market structure bill passing this year appear to be declining, reducing the likelihood of a near-term catalyst for fresh investor inflows, though Citi analysts still estimate roughly a 50% chance of approval and view the legislation as a possible catalyst for renewed interest in digital assets. As per Citi's analysis, recent flows have been negative, and the chances for the passage of a U.S. market structure bill are diminishing. The bank is monitoring the progress of the CLARITY Act, which recently advanced onto the U.S. Senate's legislative calendar, with analysts still viewing it as a potential catalyst for renewed interest in digital assets. Regulatory discussions have continued beyond the first quarter, with the SEC identifying digital assets as a strategic priority through 2030 and stating intentions to establish a clearer regulatory framework for digital asset markets. Meaningful regulatory progress could improve investor sentiment, which has remained under pressure amid sustained spot Bitcoin ETF outflows.
