Crypto Funds Lost $454 Million as Fed Rate-Cut Hopes Dim

Global digital asset investment products logged $454 million in net outflows last week, nearly erasing early-year gains. The decline followed fading expectations for a March Federal Reserve rate cut, according to CoinShares. The outflows marked a sharp reversal from the initial inflows seen in early January.

Investors withdrew from Bitcoin-linked products the most, with $405 million in redemptions over the past week. Short-Bitcoin products also saw $9.2 million in outflows, reflecting a mixed positioning in the flagship cryptocurrency. Ethereum investment products followed, recording $116 million in net outflows.

Smaller outflows were noted in Binance and Aave-focused products, which saw $3.7 million and $1.7 million in net withdrawals, respectively. Despite the broader slump, some altcoins saw inflows. XRP and Solana funds attracted $45.8 million and $32.8 million in inflows, respectively.

Why Did This Happen?

Investor optimism around a potential Federal Reserve interest rate cut in March faded following recent macroeconomic data releases. Hotter-than-expected U.S. services-sector activity and persistent labor-market strength reduced market expectations for rate cuts. CME FedWatch probabilities for a March cut have dropped from earlier levels around 45% to 52%.

The Fed's perceived independence was also challenged by White House pressure, with President Donald Trump reportedly threatening legal action against Fed Chair Jerome Powell over a building renovation. This added to macroeconomic uncertainty and increased risk-off positioning among investors.

How Did Markets React?

Bitcoin and Ethereum prices have slumped since the initial inflows, with BTC down over 2% in the last week. The broader crypto market moved in line with macroeconomic sentiment, as investors rotated into safer assets like gold. This risk-off shift was also reflected in the U.S. dollar, which weakened broadly amid the Fed-White House tensions.

The outflows from Bitcoin ETFs were particularly notable, with $1.13 billion lost in three days. Ether ETFs also experienced significant outflows, shedding $258 million since January 7. Despite this, altcoin ETFs attracted $101.7 million in net inflows during the same period.

What Are Analysts Watching Next?

Investors are closely watching upcoming U.S. economic data, including the Consumer Price Index and nonfarm payrolls. These reports could provide clarity on whether the Fed will move toward rate cuts in 2026. Morgan Stanley and Citigroup have adjusted their forecasts, expecting two to three 25-basis-point cuts in the year.

Bitcoin's behavior around credibility shocks has historically followed a two-phase pattern: initial risk-off selling followed by narrative-driven demand. The next Federal Open Market Committee meeting on January 27–28 could also be a key catalyst. Market sentiment may shift depending on whether the Fed signals a rate-cut path.

Altcoin investors remain selective, with XRP, Solana, and Sui attracting inflows. These moves suggest that capital is rotating into high-conviction altcoins rather than leaving the market entirely. However, the sustainability of this trend depends on broader macroeconomic signals and institutional risk appetite.

Investors in U.S. spot Bitcoin and Ether ETFs have shown cautious behavior, with Bitcoin ETFs holding $117.66 billion in assets as of January 8. Ether ETFs had $18.93 billion in assets, reflecting a similar trend of investor hesitancy despite the market's overall bullish technical setup.

The recent developments in crypto fund flows highlight the growing influence of macroeconomic and political factors on digital asset markets. With the Fed's policy outlook evolving and U.S.-China trade tensions persisting, investors remain closely monitoring the next moves from central banks and global economic indicators.