Gate Research Institute: ETF Outflows Suppress Risk Appetite, Enabling Bidirectional Systemic Traversal of Weak Markets

Summary

• The May cryptocurrency market shifted from an early-month surge to mid-month pullback and low-volatility consolidation at month-end. BTC, ETH, and SOL all reached a phase high in early January before entering correction; mainstream ETFs showed weakening inflows, perpetual contract trading remained high, and the market exhibited a structure dominated by spot weakness and leverage.

• The dual moving average cluster breakout strategy performed best. Equal-weighted buy-and-hold returns for three assets were about -6.09%, long-only strategy returns about -3.65%, and the dual-sided strategy about +2.11%. The gains mainly came from shorting ETH and SOL during their trend segments, confirming that May’s market was more suitable for dual-trend trading.

• Under low-volatility compression, disciplined trading outperformed subjective judgment. EMA12 exit mechanism effectively controlled false break losses, and 3R take-profit preserved trend gains. The current market remains in a phase of directional choice; identifying states, managing risk, and executing dual signals form a superior trading framework compared to chasing highs subjectively.

The main contradiction in May’s crypto market was the divergence between spot prices and leverage trading structures after the initial surge. BTC, ETH, and SOL all peaked in early May, then entered retracement and low-volatility consolidation. BTC fell from a 4H close of $77,117.4 to $73,684.0, a -4.45% monthly return. ETH declined from $2,283.02 to $2,007.0, -12.09%. SOL dropped from $83.90 to $82.44, -1.74%. SOL’s closing decline was smaller, with intra-month highs near $98.40 and retracement to around $80, with actual trading volatility significantly exceeding the monthly price range.

The month’s strategy backtest results are clear. Equal-weight buy-and-hold for the three assets yielded about -6.09%; long-only EMA cluster breakout strategy about -3.65%; dual-sided EMA cluster breakout strategy about +2.11%. The dual-sided approach outperformed buy-and-hold by roughly +8.2%, mainly driven by short trend segments in ETH and SOL, especially after mid-May.

The effective trading framework for May was: first identify EMA cluster compression, then allow price to complete directional choice upward or downward; manage failed signals with EMA12; limit single trade loss to 2.5%; and use 3R (3 * 2.5%) for trend profit retention. This framework suits a market with low win rate, high reward-to-risk ratio, and trend leg concentration like May.

US stock factors reinforced this view. In May, AI-weighted stocks showed profitability and industry prosperity support; Nvidia announced strong quarterly earnings, with Q1 FY2027 revenue around $81.6 billion, briefly reaching a $5 trillion market cap milestone. The correlation between BTC and S&P 500 remained high, with 30-day correlation around 0.74 earlier in 2026 and still near 0.6 at month-end. Crypto assets did not detach from the US stock risk budget framework in May. Continuous outflows from BTC ETFs, weakening ETH ETF inflows, and rising perpetual contract volume all contributed to crypto underperforming US tech giants.

1. Market Structure: Surge at start, weakening mid-month, low volatility at month-end

The first phase in May occurred from May 1 to May 6. BTC rose from $77,117.4 to $82,828.2; ETH from $2,283.02 to $2,423.99; SOL continued to rise until May 11, reaching $98.40. During this phase, short-term moving average clusters moved upward, volatility was within manageable ranges, and the market showed signs of recovery. SOL led in resilience, with funds willing to take on higher risk exposure early in the month.

The second phase started on May 7. BTC failed to stabilize above $82k, ETH couldn’t hold above $2,400, and SOL formed a monthly high near $98.0. Breakout signals increasingly failed, prices retreated near EMA12 repeatedly triggering exits. After May 14, long trades on BTC triggered stops; ETH’s long trades after May 6 also failed; SOL entered a clear downtrend after May 15.

The third phase from May 22 to month-end saw BTC decline toward ~$73k, ETH near $2,000, and SOL back to around $82. Price volatility narrowed, moving average cluster width decreased, and the market entered a new compression phase.

The retracement within the month confirmed asset roles. BTC’s maximum drawdown from high to low was about 12.5%, ETH about 18.8%, SOL about 18.7%. BTC served as a risk anchor, while ETH and SOL amplified risk appetite. After BTC weakened, ETH and SOL retraced faster, indicating a need to reduce long exposure in high-beta assets at the strategy level.

2. Capital structure: Stablecoins remain, mainstream ETFs weaken

As of May 31, total stablecoin market cap was about $320 billion, DeFi TVL approximately $251 billion. Underlying dollar liquidity did not show systemic retreat. CEX spot volume was about $124.2 billion in 24 hours; CEX perpetual volume about $894.4 billion, with perpetual trading roughly 7.2 times spot. Price discovery was increasingly driven by derivatives markets.

ETF flows became a key pressure point in the second half of May. Public reports showed BTC spot ETF experienced 9 consecutive days of net outflows totaling about $2.8 billion, with a single-day outflow of around $649 million, including BlackRock’s IBIT outflows of about $448 million. ETH ETFs also faced pressure, with net outflows of about $241 million in the last week of May.

However, capital did not entirely leave crypto. Altcoin ETFs like SOL and XRP saw small net inflows; new ETF narratives such as HYPE gained attention. Funds shifted from mainstream BTC and ETH ETFs to thematic ETFs and high-elasticity assets. This structure indicates the core issue: mainstream spot participation cooled, and capital moved into sector rotation and short-term trading.

Derivatives data aligned with this view. BTC, ETH, and SOL’s active buy-sell ratios were below 1, with active selling slightly dominant. Funding rates hovered around 0.01%, not reaching extreme crowded levels. The May market was in a typical state: leverage trading active, spot participation insufficient, active buy orders weak, and price breakouts prone to false signals.

3. US stock linkage: AI leaders support Nasdaq, crypto ETFs face capital pressure

May’s crypto performance must be viewed within the US stock risk appetite framework. BTC’s correlation with S&P 500 remained high, with 30-day correlation around 0.74 earlier in 2026 and still near 0.6 at month-end. On a broader scale, BTC was a high-beta risk asset this month, lacking stable independent safe-haven features.

The core support from US stocks came from AI and large tech stocks. Nvidia announced strong quarterly results in May, with Q1 FY2027 revenue around $81.6 billion, briefly hitting a record high and revisiting a $5 trillion market cap milestone. AI-weighted stocks supported Nasdaq’s risk appetite through earnings confirmation. Crypto assets lacked equivalent profit anchors; prices were influenced by ETF flows, derivatives leverage, and liquidity expectations.

This cross-asset divergence affected May’s strategy outcomes. Leading US tech stocks had earnings-driven support; BTC and ETH ETFs experienced outflows, and capital reallocated within large risk assets. Traditional funds continued to buy high-confidence AI leaders, reducing exposure to BTC ETFs. The lack of spot participation meant that breakout attempts in crypto often turned into false moves.

Macro data in May also compressed risk budgets. Key data included NFP, CPI, PPI, GDP revisions, and PCE. Employment, inflation, and growth data directly impacted US bond yields, dollar valuation, and Nasdaq multiples, which in turn influenced BTC ETF redemptions and perpetual funding rates. Market focus shifted to early June data releases like employment reports, ISM, JOLTS, ADP, and the FOMC and options expiry windows. Low-volatility compression in crypto appeared around these events; position reduction and risk budget decline are reasonable explanations.

4. Volatility: Short-term compression, insufficient price strength

At month-end, BTC’s 7-day 4H volatility was about 0.46%, 30-day 4H about 0.64%; ETH about 0.7% and 0.81%; SOL about 0.76% and 1%. Short-term volatilities for all three assets were below their medium-term levels, indicating a market in low-volatility compression.

Low-volatility compression signals near-term market direction choice, but does not guarantee an upward breakout. BTC closed at $73,684.0, with EMA12 near $73,776.35; ETH closed at $2,007.0, EMA12 near $2,016.34; SOL closed at $82.44, EMA12 near $82.39. BTC and ETH remained in weak zones, SOL just returned to EMA12 vicinity. Price strength was insufficient; low volatility was closer to consolidation after a decline.

The width of moving average clusters showed similar conditions. BTC’s cluster width at month-end was about 0.57%, ETH about 0.63%, SOL about 0.58%, all below the 2.2% strategy threshold. This environment would frequently trigger breakout signals. Data from May indicated that after cluster compression, dual-direction trading must be allowed; only trading on breakouts upward would systematically miss downtrends.

5. Backtest of strategy: 4H EMA cluster breakout system

The strategy used six moving averages: EMA6, EMA12, EMA24, SMA6, SMA12, SMA24. The cluster width was calculated as the maximum minus minimum of these six lines, divided by the current close. When the previous candle’s cluster width was below 2.2%, and the current close broke above the upper boundary, a long entry was triggered at the next 4H open. Conversely, if the previous cluster width was below 2.2% and the current close broke below the lower boundary, a short entry was triggered at the next 4H open.

Exit rules were fixed: long positions exited on a close below EMA12; short positions exited on a close above EMA12. Single trade stop-loss was 2.5%, and take-profit was 3R (7.5%). If both stop-loss and take-profit were triggered simultaneously on the same candle, stop-loss took priority. Transaction costs were deducted at 8 basis points per round trip. If positions remained at month-end, they were closed at the last 4H close.

The report also tested two versions: a long-only version trading only upward breakouts; and a dual-sided version trading both upward and downward breakouts. Results for May showed the dual-sided version aligned better with market conditions.

5.1 Long-only strategy: declining breakout signal quality

The long-only strategy failed overall. BTC traded 11 times, with a return of -5.36%, win rate 18.2%, max drawdown -10.08%. ETH traded 10 times, -6.49%, 10.0% win rate, max drawdown -10.64%. SOL traded 11 times, +0.91%, 18.2% win rate, max drawdown -7.11%.

BTC long-only gains were concentrated in two early trades. Entered on May 1, exited on May 4, net +2.09%. Entered on May 4, exited on May 7, net +0.92%. After that, signal quality declined; the long on May 14 triggered a stop-loss, resulting in a net loss of -2.58%.

ETH performed weakest in long-only. Entered May 1, exited May 5, net +3.17%. Subsequent 9 long signals were all losses. ETH’s breakouts mostly reflected weak rebounds, not trend expansions.

SOL had small profits, from two trades. Entered May 5, exited May 8, net +3.95%. Entered May 8, hit 3R take-profit on May 10, net +7.42%. Most other signals were losses. SOL was the only asset with positive returns through long-only in May, with highly concentrated gains.

5.2 Dual-sided strategy: short trend legs contributed main gains

The dual-sided strategy significantly improved results. BTC’s dual strategy returned -2.83%, ETH +3.14%, SOL +6.05%. The equal-weighted dual strategy for all three assets was +2.11%, compared to about -6.09% for buy-and-hold.

BTC dual strategy still showed a loss, but smaller than long-only. 18 trades, 22.2% win rate, max drawdown -10.74%. Largest contributions came from two short trades: May 15 short, exited May 20, +2.35%; May 26 short, exited May 30, +3.42%. Frequent false signals in mid-May caused losses due to repeated long-short switching.

ETH dual strategy gained +3.14%, with 18 trades, 38.9% win rate, max drawdown -8.26%. Key trade: short on May 15, exited May 17 with 3R profit, +8.03%. Short on May 26, exited May 29, +2.68%. Long signals failed; short trend legs provided main gains.

SOL dual strategy gained +6.05%, with 22 trades, 22.7% win rate, max drawdown -8.17%. Both long and short trend signals were active. Entered long on May 8, hit 3R on May 10, +7.42%. Entered short on May 15, hit 3R on May 17, +8.03%. SOL’s trend elasticity was strongest, but trading noise was also highest.

5.3 Trade distribution: low win rate structure, few large trades dominate gains

Among 58 total trades in the dual strategy, the number of profitable trades was limited. BTC win rate 22.2%, ETH 38.9%, SOL 22.7%. Gains mainly derived from a few large trend trades; losses from EMA12 exits and fixed stop-loss controls.

Cumulative profit per trade showed early-month net value oscillation, mid-month gains driven by ETH and SOL short trades, and late-month contributions from BTC and SOL shorts. Losses concentrated during repeated long-short switching phases. The system features low win rate but high reward-to-risk, suitable for markets with clear trend legs, not for choppy consolidation.

Breaking down contributions by long and short trades clarifies the month’s sources. BTC’s long contribution was negative, short contribution positive. ETH’s long contribution was negative, short contribution significantly positive. SOL’s both long and short contributions were positive, with short more stable. The main trend in May was a downtrend after failed attempts to break higher.

Win rate, expected return, and max drawdown show SOL’s per-trade expectation was highest, ETH second, BTC weakest. BTC had the highest false breakout density; ETH’s direction was cleaner; SOL had the strongest elasticity.

5.4 Exit mechanisms: EMA12 controls noise, 3R preserves trend gains

Analysis of exit reasons shows EMA12 exits were most common. Many trades did not end via stop-loss but by returning near EMA12 after breakout failure. EMA12 rules reduced holding time on false signals and prevented loss spread.

Number of stop-loss trades was limited; losses were concentrated. 3R take-profit trades were few but contributed significant gains. This aligns with trend-following logic: most trades small loss or small gain, a few trend trades generate main profits. If May had no 3R take-profit, large trades in SOL and ETH would have been cut short; removing EMA12 exits would have increased losses during consolidation.

Signal timelines showed dense long signals early May, increasing short signals mid-month, with mixed signals late month. Dense signals do not mean dense opportunities; effective signals are concentrated in short, clear directional windows.

5.5 Enhanced filtering failure: volume breakouts in May are traps

An enhanced filtering version was also tested. Conditions included: 7-day volatility not exceeding 30-day volatility by 1.15x; volume not below 20 candles (4H each) at 0.9x average; longs near 20 candles high; shorts near 20 candles low. This version performed worse. BTC’s enhanced dual strategy returned -3.40%, ETH -5.03%, SOL -2.58%, all at -3.63% for equal weights.

Failure reason: volume surges in May often occurred near local tops. BTC’s enhanced long signal on May 4 at $80,322.9 was stopped out within 4 hours, net -2.58%. ETH’s on May 6 at $2,410.39 was also stopped out. SOL’s similar signals also triggered stops.

Volume increase indicates participation but not quality of capital. May’s volume spikes mainly reflected topping, leverage liquidations, and short-term chasing. Effective filtering should incorporate ETF flows, spot trading share, active buy-sell ratio, perpetual volume share, and US stock risk appetite. Price and volume alone can identify volatility but not trend continuation.

5.6 Asset-specific conclusions

BTC remains a state anchor. Its monthly decline was smaller than ETH’s, with more controllable retracement. BTC dual strategy returned -2.83%, indicating BTC itself was not the best return asset in May. It’s better used as a risk budget indicator. If BTC cannot regain EMA12 and the 30-line zone, reduce long weights in ETH and SOL.

ETH is a weak main trend. Monthly decline -12.09%, with very low success rate for long breakouts; dual strategy relies on short profits. ETH failed to hold above $2,400, breaking below $2,300, $2,200, and $2,100 consecutively. Future focus should be on recovering the $2,100–$2,200 zone before reassessing long weights.

SOL is a trading asset. Monthly close down only -1.74%, but intra-month path was very volatile. SOL dual strategy gained +6.05%, much higher than BTC and ETH. SOL suits trend-following, not passive holding. Its low win rate, high elasticity, and concentration of trend trades are core features in May.

5.7 June strategy framework

June will continue using the dual 4H EMA cluster breakout system. Unilateral chasing longs should be de-emphasized. BTC acts as a state filter; ETH and SOL as assets confirmed by relative strength. If BTC reclaims EMA12 and the 30-line zone, and ETF outflows slow, active buy-sell ratios return above 1, long signal weights can increase. If BTC remains below $74k–$76k, the market stays in a weak recovery phase.

US stock filtering should be retained. Nasdaq and AI leaders remain strong; simultaneous ETF outflows in BTC suggest cross-asset risk budget rebalancing. Despite Nasdaq’s strength, BTC ETF outflows indicate funds favor more certain US tech stocks. Crypto breakout attempts remain cautious. When US stocks and crypto weaken together, short signals in ETH and SOL gain priority.

Position rules stay mechanical: risk per trade 2.5%, take profit 3R, EMA12 exit unchanged. Breakout signals should not trigger heavy positions alone. When spot participation is weak, ETF outflows high, perpetual volume elevated, and active buy orders insufficient, breakout signals should be de-emphasized; breakdown signals should be given more weight.

6. Conclusion

The May crypto market experienced a transition from a recovery phase to a failure. BTC, ETH, and SOL all surged early in the month, trend quality declined mid-month, and low-volatility consolidation dominated at month-end. Stablecoins and DeFi liquidity persisted; weakening ETF participation and rising derivatives volume shifted price discovery toward leverage markets.

The strategy results provide clear guidance. Buy-and-hold performed weakest; only the dual EMA cluster breakout strategy achieved the best results. Equal-weight buy-and-hold for the three assets was about -6.09%; long-only about -3.65%; dual-sided about +2.11%. Gains mainly derived from ETH and SOL short trend legs, and SOL’s early-month long trend.

US stock factors offered a fuller explanation. Leading AI tech stocks still had earnings support; Nvidia and others supported US risk appetite; BTC and ETH ETFs experienced continuous outflows, and crypto assets’ participation weakened. The high correlation between BTC and S&P 500 indicates crypto remains influenced by US risk budgets and macro rate expectations.

June’s trading focus is not on predicting direction in advance. The better approach is to identify market states, execute dual signals, control individual risk, and preserve trend gains. After cluster compression, both breakouts and breakdowns can generate valid trades. EMA12’s exit mechanism protects against false signals; 3R take-profit covers most large trades with small losses. Under current conditions, disciplined dual systems outperform subjective chasing.

References

• Gate, https://www.gate.com/trade/BTC_USDT

• Investor, https://investor.nvidia.com/news/press-release-details/2026/NVIDIA-Announces-Financial-Results-for-First-Quarter-Fiscal-2027/default.aspx

• DeFiLlama, https://defillama.com/stablecoins

• CMC, https://coinmarketcap.com/charts/

• BlackRock, https://www.blackrock.com/us/individual/products/333011/ishares-bitcoin-trust

• Coinglass, https://www.coinglass.com/etf/bitcoin

• K33, https://k33.com/research/articles/waiting-and-seeing

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