Structural Changes in the Cryptocurrency Market: The Impact of ETF Flows on Long and Hedge Fund Strategies

Crypt markets at the beginning of 2025 have likely accumulated from major financial institutions. However, the natural shift in institutional fund entry dynamics has fundamentally changed market behavior. Growing flows into Bitcoin and Ethereum ETFs have sharply reduced price volatility and tightened spread structures. As a result, although low volatility was expected, hedge funds saw their main sources of income diminish.

Institutional Entry and Liquidity Structure

Regulator-approved Bitcoin and Ethereum exchange-traded products directed passive capital flows toward core assets. This shift was extremely significant for market makers and real traders. Price discovery occurred easily, order book depth decreased, and trading spreads narrowed.

By November 2025, the market reported a 2.5% decline in portfolios of directed crypto funds, marking the worst performance in the last three years, coinciding with the most challenging period since 2022. The initial rapid price increase of Bitcoin forced traders into quick action, but the actual usable liquidity level had already been lost by the market.

The dominance of institutional products in the market space finally curtailed traditional arbitrage and spread trading. The narrowing gap between supply and demand eliminated the effectiveness of purely price-based trading strategies.

Directed Funds’ Collapse

Losses in volatility-dependent trading strategies encompass all possible approaches. Portfolios focused on blockchain technologies and various tokens declined by an average of 23% throughout the year. The core issue was that quant-based models began to malfunction amid liquidity deterioration.

Funds specializing in altcoins suffered the heaviest blow. The shadow of order books and rapid exits by market makers under external factors triggered sharp price drops. Short-term correction and mean reversion strategies failed.

Founders of entities like M-Squared, such as Kacper Szafran, had to completely shut down strategies waiting for liquidity. Their October performance, 3.5% below, was clarified by comparison with the most disastrous month since 2022, which had a slumped shape.

Political Shocks and Chain Reactions

On October 10, during Asian hours, headlines quickly escalated. Donald Trump proposed imposing 100% tariffs on China, causing Bitcoin to plummet by 14% within hours. Nearly $20 billion in leveraged positions were liquidated.

Forteus’ other licensed manager, Thomas Chladek, discussed how this trade started during the Asia-Europe trip and how liquidity contracts quickly reversed: “Initially, risk-off behavior dominated, but as positions and market makers exited, some leveraged positions held on.”

Yuval Reisman, main partner at Atitlan Asset Management, described 2025 as a year of political volatility. News topics involving Trump and market risk shifts were unexpected. Consequently, existing institutional changes intensified further.

New Opportunities and Structural Adjustments

During the period of liquidity drought in Asian trading hubs(, funds experienced rapid losses. As leverage decreased and ETF external flows’ core assets remained stable, managers are revising market strategies. New opportunities based on volatility are being sought.

Changes in market structure benchmarks forced funds to reassess risk exposure and trading models. As Bitcoin and Ethereum market flows stabilize, it is time to readjust portfolios.