Citi: Bitcoin's Dearth of Fresh Investors Matters More Than Strategy's Sale

What to know:

• Citi said Strategy's recent bitcoin sale was part of a previously disclosed tax-optimization plan and does not alter the firm's broader strategy.
• The bank estimated spot bitcoin ETF flows explain roughly 45% of weekly BTC price moves and remain the best gauge of investor adoption.
• The bank expects sentiment to remain subdued as ETF flows turn negative and prospects for a U.S. crypto market structure bill diminish.

Strategy's (MSTR) recent bitcoin (BTC $66,924.57) sale has had an outsized impact on market sentiment, but Wall Street bank Citi says spot bitcoin exchange-traded fund (ETF) flows are the primary driver of BTC prices. Strategy briefly stepped off the buy-and-hold throne; markets responded with appropriate drama.

Markets were rattled after Strategy disclosed the sale of a small portion of its bitcoin holdings, marking a rare departure from Executive Chairman Michael Saylor's long-standing "buy and hold" approach. The largest cryptocurrency has slumped 9% since Sunday and earlier Wednesday dropped to the lowest since March.

The sale should not have been a surprise, the bank said. Executive Chairman Michael Saylor mentioned plans to dispose of certain tax-disadvantaged bitcoin holdings as part of a portfolio optimization effort during its first-quarter earnings call. Even the staunchest HODLer occasionally files paperwork.

A bigger issue is the lack of investor demand. "Recent flows have been negative, and the chances for the passage of a U.S. market structure bill (a potential catalyst for renewed investor interest in our view) are diminishing," analyst Alex Saunders wrote in the Tuesday report.

Saunders said spot bitcoin exchange-traded fund (ETF) flows remain the primary driver of BTC prices, estimating they account for about 45% of weekly return variation. The ETFs have experienced a record 11 straight days of net outflows, which, he said, signals a broader lack of investor demand for the cryptocurrency. Eleven straight days of redemptions, Citi notes, is arguably the more interesting headline.

The report also warned that the chances of a U.S. crypto market structure bill passing this year appeared to be declining, reducing the likelihood of a near-term catalyst for fresh investor inflows. Combined with bitcoin's underperformance relative to equities, the fading legislative outlook is likely to keep sentiment muted absent regulatory progress or renewed concerns about fiscal sustainability, the report added.

Read more: Bitcoin faces outsized quantum threat as computing breakthroughs accelerate, Citi says

UPDATE (June 3, 14:10 UTC): Adds BTC performance this week, ETF outflow streak record.