Crypto market experiences third consecutive quarterly decline amid ETF outflows and regulatory uncertainty

Original author: Ashrith Rao

Saoirse, Foresight News

The crypto market has just experienced its worst quarter since 2022. Combining the price action since July, we’ll examine the key challenges that need to be reversed in the third quarter.

If the market continues to decline for three consecutive quarters, it cannot be simply defined as a correction.

The total market capitalization of cryptocurrencies decreased by $304.8 billion, or 12.6%, to $2.1 trillion. Compared to the all-time high of $4.27 trillion reached in October 2025, current market value has plunged more than 52%, reaching its lowest level since September 2024.

The daily average trading volume for the market was $93.1 billion, a 20.9% year-over-year decline. Data from leading compliant exchanges shows: perpetual contracts trading volume fell 10% to $12.7 trillion, while spot trading volume dropped 27.9% to $1.95 trillion.

Stablecoins, which had been the industry's most stable growth segment since 2023, are now experiencing their first decline in over three years, with market capitalization dropping 1.6% to $305.1 billion.

All key indicators point to the same conclusion: funds are exiting the crypto market rather than being reallocated within the industry.

More important than the total scale of losses is the structural impact within the market.

At the end of June, Bitcoin's price dropped to around $58,500, hitting its lowest level since 2024, with a quarterly decline of 14.2%. Ethereum fared even worse, plunging 25.4% for the quarter and reaching a low of approximately $1,625.

A consensus among experts: During the second quarter, Bitcoin and U.S. equities moved in tandem downward—not merely reacting to the stock market, but even replacing riskier stocks in terms of price behavior; yet during the S&P 500’s rebound phase, Bitcoin and related risk assets continued to underperform the broader market.

The联动 trading logic that dominated from 2024 to 2025 has broken down. At that time, Bitcoin was viewed as a risk-on asset, with its price highly correlated to the Nasdaq index.

The current situation is markedly different: the entire cryptocurrency industry is undergoing an active deleveraging process due to sustained redemptions from spot ETFs, the Federal Reserve’s tightening monetary policy, and large-scale selling of Bitcoin by corporate treasury firms like Strategy. Previously, Strategy’s consistent accumulation of Bitcoin was a key factor supporting market optimism for 2024.

U.S. spot Bitcoin ETFs attracted $2.02 billion in inflows in April, but subsequently faced massive redemptions over the following months, resulting in a net outflow of approximately $4.67 billion for the second quarter.

In June, capital outflows approached $4.5 billion, marking the worst monthly performance on record for this category.

This is by no means a minor signal that can be ignored. ETF subscription and redemption directly reflect genuine market buying and selling activity, not merely market sentiment; continuous capital redemptions indicate that Bitcoin spot assets are steadily flowing into exchanges for sale.

The market is experiencing a significant adjustment in pessimistic expectations: Citigroup, once one of Wall Street’s most bullish institutions on crypto assets for 2025, announced on July 1 that it had lowered its 12-month Bitcoin price target from $112,000 to $82,000.

However, some early signals suggest that this round of capital outflow cycle may be nearing its end.

Santiment data shows that since May 6, cumulative outflows from ETFs have exceeded $8.5 billion. Historical patterns suggest that withdrawals of this magnitude typically correspond to a bottoming-out selling phase, rather than the beginning of a new sharp decline.

Glassnode data shows: Despite ongoing institutional outflows, Bitcoin long-term holders resumed accumulating in early July.

When the market approaches the bottom of a cycle, the divergence in behavior between retail and institutional investors is often more pronounced than during the middle of a crash.

In early July, ETF funds briefly reversed course, recording a net inflow of $46.6 million, signaling a temporary uptrend. Subsequently, driven by BlackRock’s IBIT fund, $510 million flowed in over three days. However, this rebound proved unsustainable, as funds shifted back to outflows, with a net outflow of approximately $85 million on July 8.

In the first three weeks of July, Bitcoin's price fluctuated within the range of $56,000–$64,000, repeatedly testing the resistance level at $63,700–$64,000 but failing to break through and subsequently declining under pressure.

The entire market is currently focused solely on the Federal Reserve, with attention highly concentrated. The June Federal Open Market Committee (FOMC) meeting kept interest rates unchanged in the range of 3.5%–3.75%, marking the first rate-setting meeting chaired by Kevin Warsh.

The benchmark interest rate has remained unchanged since December 2025. Nevertheless, several Federal Reserve officials signaled the possibility of rate hikes this year, while Walsh himself did not provide a clear policy outlook. This statement was significantly more hawkish than market expectations, helping explain why yieldless assets like Bitcoin have struggled to sustain their upward momentum.

Currently, nearly all trading desks view the FOMC meeting on July 28–29 as the most important event of the third quarter. Two scenarios are being considered: If the Fed signals a dovish stance, Bitcoin is likely to stabilize in the $68,000–$84,000 range, providing a foundation for ETF capital inflows; if the policy stance turns hawkish, $50,000–$56,000 could become Bitcoin’s new trading range.

In addition, the Bitcoin reserves held by enterprises constitute a tail risk unique to this cycle.

This June's asset sell-off was initially promoted as a exclusive operation aimed at capturing dividends.

Over the past two years, the crypto industry has accumulated stable institutional funding. However, if other corporate treasury entities, under balance sheet pressure, follow suit by selling Bitcoin, the entire industry could lose its institutional funding support.

From 2025 to early 2026, the industry strongly advocated for the passage of the CLARITY Act, which aims to define regulatory boundaries: the Commodity Futures Trading Commission (CFTC) would regulate digital assets as commodities, while the Securities and Exchange Commission (SEC) would regulate digital assets as securities.

The House passed the bill in July 2025 by a vote of 294 in favor and 134 opposed; in May 2026, the bill advanced in the Senate Banking Committee by a vote of 15 to 9. However, since then, the legislative process has stalled.

The bill originally set July 4 as the informal review deadline; after failing to progress on schedule, market expectations deteriorated sharply: in February, the market estimated an 82% probability of the bill being enacted within 2026, but by mid-July, this probability had declined to the 40%–45% range. The Senate had initially scheduled discussion of the bill for June 1, but ultimately did not proceed as planned.

Several unresolved issues remain: President Trump’s cryptocurrency holdings and disclosure obligations, protections for developers under Section 604 of the bill, and regulations regarding stablecoin yields.

To reach the 60-vote threshold needed in the Senate to end a filibuster, support from seven additional Democratic senators is required, but only two Democratic senators have publicly expressed support for the bill so far.

Stifel and Beacon Policy Advisors analysts warn: if there is no progress by July, the substantive advancement of the bill may be delayed until 2027, when the Senate will enter its recess and the U.S. midterm elections will draw nearer.

The current ambiguity in regulatory rules continues to impact the price movements of crypto assets.

Investors are increasingly factoring in the risks posed by prolonged regulatory uncertainty, which has raised risk premiums across all crypto products—even the most conservatively structured projects are not immune.

This uncertainty continues to impact core processes such as token issuance, asset custody, and exchange registration.

As a result, industry funds are no longer widely diversified; capital is concentrating toward a few companies capable of generating stable profits.

The vast majority of market sectors are shrinking, with only two sectors growing against the trend—a phenomenon reflecting a shift in genuine market demand.

Prediction markets have experienced a surge, with notional trading volume rising 48.7% year-over-year to reach $113.8 billion. June became a watershed moment for the industry, with monthly trading volume nearing $50–53 billion, setting a new monthly record.

Kalshi holds a 58.9% market share in the industry; over the past year, approximately 80%–87% of Kalshi’s trading volume came from sports derivatives contracts.

The sector is growing rapidly with a clear target customer base, but it is heavily constrained by legal and regulatory policies.

On June 10, the U.S. Commodity Futures Trading Commission released a draft of new regulations, initiating a 45-day public comment period. The regulatory approach aims to preserve the normal operation of the vast majority of sports betting markets while prohibiting derivatives contracts based on player injuries, referee decisions, and certain real-time in-game events.

Meanwhile, multiple state governments are embroiled in complex legal disputes with prediction markets, and Arizona has officially filed a lawsuit. These legal disagreements may ultimately be resolved by the Supreme Court.

Leveraging a mature institutional partnership ecosystem, the sector continues to expand: Polymarket has partnered with Dow Jones, and Kalshi has teamed up with Nasdaq. However, litigation at the state level continues, and a comprehensive legal framework has yet to be established.

Tokenized collectibles performed strongly in Q2, with trading volume surging approximately 143% quarter-over-quarter to reach $1.4 billion. Among these, Collector Crypt saw remarkable growth, with June trading volume jumping 317% to $406 million—more than 12 times the NFT trading volume on OpenSea during the same period.

Even amid a bear market, real-world asset tokenization (RWA) continues to grow steadily, with tokenized assets issued by 177 entities totaling approximately $28.1 billion on-chain.

The growth of this sector is driven by the fundamentals of income-generating physical collateral assets, independent of the cyclical risks of the crypto market. This developmental characteristic closely mirrors the trend of institutional ecosystem building in prediction markets.

Although Walsh declined to provide policy guidance, the dot plot signaled a bias toward tightening, the market still views the FOMC decision on July 28–29 as the most important event of the quarter.

It is currently uncertain whether the Senate will be able to consider the CLARITY Act before its August recess. Supporters of the bill anticipate a revised version to be introduced around July 20. Significant obstacles remain: the bill still needs seven additional Democratic votes to pass. Wall Street’s consensus has shifted, and the likelihood of enactment has changed from “likely” to “uncertain.”

Considering all indicators, the market currently lacks the foundation for an extreme sharp decline.

Although the market's profit potential has significantly weakened, with average on-chain transaction fees across major sectors in June declining by 44.6%, Bitcoin's price has remained consistently near the 200-week moving average, and its long-term support structure remains intact.

The market trading logic has changed: participants are no longer solely relying on various narratives and hype; trading decisions are now more focused on price trends, policy choices, and interest rate expectations, making it difficult to see broad rallies driven purely by optimism.