Gate Research: ETF Outflows Suppress Risk Appetite, Dual-Direction System Navigates a Weak Market

Summary

• The crypto market in May experienced a surge at the beginning of the month, followed by a mid-month pullback and low volatility consolidation towards the end. BTC, ETH, and SOL all formed local highs in early May before entering a correction phase. Mainstream ETF demand weakened, perpetual contract turnover remained high, and the market exhibited a structural characteristic of weak spot performance dominance by leverage.

• The dual-direction moving average cluster breakout strategy performed the best. The equally weighted buy-and-hold return for the three assets was approximately -6.09%, the long-only strategy return was approximately -3.65%, and the dual-direction strategy return was approximately +2.11%. Profits primarily stemmed from bearish trend legs in ETH and SOL, validating that May's market was more suitable for dual-direction trend trading.

• Disciplined trading outperformed subjective judgment under low-volatility compression. The EMA12 exit mechanism effectively controlled losses from false breakouts, while the 3R take-profit preserved trend profits. The current market remains in a phase of direction selection. A trading framework focused on identifying market states, controlling risk, and executing dual-direction signals is superior to subjective trend-chasing.

The primary contradiction in the May crypto market was the divergence between spot demand and leveraged trading structures after prices peaked early in the month. BTC, ETH, and SOL all formed local highs in the first half of May, followed by a pullback and low-volatility consolidation. BTC fell from an early-month 4H close of $77,117.4 to $73,684.0 at month-end, a monthly return of -4.45%. ETH dropped from $2,283.02 to $2,007.0, a monthly return of -12.09%. SOL declined from $83.90 to $82.44, a monthly return of -1.74%. While SOL's closing drawdown was smaller, it touched an intra-month high of $98.40 before retreating to around $80.00, indicating actual trading volatility was significantly higher than the monthly return suggests.

The results of this month's strategy backtest are clear. The equally weighted buy-and-hold return for the three assets was approximately -6.09%; the long-only moving average cluster breakout strategy returned approximately -3.65%; and the dual-direction moving average cluster breakout strategy returned +2.11%. The dual-direction strategy achieved an excess return of approximately +8.2% compared to buy-and-hold. Profits came mainly from bearish trend legs after mid-May, with the most significant contributions from ETH and SOL.

An effective trading framework for May was: first, identify the compression of the moving average cluster, then allow the price to complete a directional breakout either upwards or downwards; use EMA12 to manage failed signals, apply a 2.5% fixed stop-loss to limit per-trade losses, and use a 3R take-profit (3 * 2.5%) to lock in trend profits. This framework suited May's market structure of low win rate, high risk-reward ratio, and concentrated trend legs.

The US stock market factor reinforced this assessment. In May, AI heavyweights were supported by strong earnings and industrial momentum. Nvidia reported robust quarterly results, with Q1 FY2027 revenue of approximately $81.6 billion, and briefly retouched the ~$5 trillion market capitalization milestone. BTC's correlation with the S&P 500 remained elevated; public data shows the 30-day correlation reached ~0.74 within 2026 and was still around 0.6 near the end of May. Crypto assets did not escape the US equity risk budget framework in May. Continuous outflows from BTC ETFs, weakening demand for ETH ETFs, and an increased share of perpetual contract turnover collectively led to crypto market underperformance compared to leading US tech stocks.

1. Market Structure: Early Month Surge, Mid-Month Weakness, Late Month Low Volatility

The first phase of May occurred between May 1st and May 6th. BTC rose from $77,117.4 to $82,828.2, ETH from $2,283.02 to $2,423.99, and SOL extended until May 11th, touching $98.40. During this phase, the short-term moving average cluster moved higher, volatility was in a controllable range, and the market exhibited characteristics of a recovery rally. SOL showed leading resilience, indicating a willingness by capital to take on higher risk exposure early in the month.

The second phase began around May 7th. BTC failed to stabilize above $82,000, ETH could not hold above $2,400, and SOL formed its monthly high near $98. Upward breakout signals began to fail frequently, with prices falling back near the EMA12 and repeatedly triggering exits. Long trades in BTC initiated after May 14th hit stop-losses, long trades in ETH initiated after May 6th consistently failed, and SOL entered a clear downtrend after May 15th.

The third phase concentrated from around May 22nd to month-end. BTC moved down to near $73,000, ETH approached $2,000, and SOL returned to around $82. Price fluctuations narrowed, the width of the moving average cluster decreased, and the market entered a new state of compression.

Intra-month drawdowns validated asset roles. BTC's maximum drawdown from high to low was approximately 12.5%, ETH's ~18.8%, and SOL's ~18.7%. BTC serves as the risk anchor, while ETH and SOL act as amplifiers of risk appetite. Once BTC weakened, the drawdown speed for ETH and SOL accelerated. Strategically, this necessitates reducing long exposure in high-beta assets.

2. Capital Structure: Stablecoins Remain, Mainstream ETF Demand Weakens

As of May 31st, the total market capitalization of stablecoins was approximately $320 billion, and DeFi TVL was around $251 billion. There was no systemic withdrawal of underlying dollar liquidity. The 24-hour spot trading volume on CEXs was approximately $124.2 billion, while perpetual contract volume was about $894.4 billion, with perpetual turnover being roughly 7.2 times that of spot. Price discovery was more heavily borne by the derivatives market.

ETF flows became a significant source of pressure in the second half of May. Public news indicated that BTC spot ETFs experienced net outflows for nine consecutive trading days, totaling approximately $2.8 billion, including a single-day net outflow of ~$649 million, with BlackRock's IBIT alone seeing a single-day outflow of ~$448 million. ETH ETFs also faced pressure, with net outflows of about $241 million in the last week of May.

However, capital did not completely exit the crypto space. Altcoin ETFs like SOL and XRP saw modest net inflows, and narratives around newer ETFs like HYPE also garnered attention. Capital migrated from mainstream BTC and ETH ETFs towards thematic ETFs and higher-beta instruments. This structure implies the core issue is cooling demand in mainstream spot markets, with capital engaging in localized rotation and short-term trading.

Derivatives data aligns with this. The active buy/sell ratios for BTC, ETH, and SOL were all below 1, indicating slightly stronger active selling pressure. Funding rates were around 0.01%, not reaching extreme levels of crowding. The May market was in a typical state: leveraged trading was active, spot market follow-through was insufficient, active buying was weak, and price breakouts were prone to becoming fakeouts.

3. US Equity Linkage: AI Leaders Support Nasdaq, Crypto ETFs Create Capital Pressure

May's crypto performance must also be viewed within the context of US equity risk appetite. BTC's correlation with the S&P 500 remained high, with the 30-day correlation reaching approximately 0.74 within 2026 and still around 0.6 near the end of May. On a larger scale, BTC behaved as a high-beta risk asset this month, lacking the characteristics of a stable, independent safe haven.

Core support on the US equity side came from AI and large-cap tech stocks. Nvidia reported strong quarterly results in May, with Q1 FY2027 revenue of ~$81.6 billion, pushing its stock to an all-time high and briefly retouching the ~$5 trillion market cap milestone. AI heavyweights supported Nasdaq's risk appetite through confirmed earnings. Crypto assets lacked an earnings anchor of similar strength, with prices influenced by ETF flows, derivatives leverage, and liquidity expectations.

This cross-asset divergence influenced May's strategy results. US tech leaders were earnings-driven, while BTC and ETH saw ETF outflows, leading to a reallocation of capital within large risk assets. Traditional capital continued buying AI leaders with higher certainty, reducing its willingness to allocate to BTC ETFs. Long-side crypto breakouts lacked spot market support, making volume-driven breakouts prone to ending in rallies that quickly faded.

The macro data calendar in May also compressed risk budgets. Key data points within the month included NFP, CPI, PPI, the second GDP estimate, and PCE. Data on employment, inflation, and growth directly impacted US Treasury yields, the US Dollar, and Nasdaq valuations, which then transmitted to BTC ETF subscriptions/redemptions and perpetual funding rates. Towards month-end, the market was already focusing on upcoming early-June data (Employment, ISM, JOLTS, ADP), along with the FOMC meeting and options expiry window. The low volatility compression in crypto occurring around these events is logically explained by position reduction and shrinking risk budgets.

4. Volatility: Short-term Compression Forming, Price Strength Lacking

By the end of May, BTC's 7-day 4H realized volatility was ~0.46% and its 30-day 4H realized volatility was ~0.64%; ETH's were ~0.7% and ~0.81% respectively; SOL's were ~0.76% and ~1% respectively. Short-term volatility for all three assets was lower than medium-term volatility, indicating the market had entered a low-volatility compression phase.

Low volatility compression suggests an approaching directional move, but does not guarantee an upward breakout. At the end of May, BTC closed at $73,684.0 with its EMA12 near $73,776.35; ETH closed at $2,007.0 with its EMA12 near $2,016.34; SOL closed at $82.44 with its EMA12 near $82.39. BTC and ETH remained in weak ranges, while SOL had just returned near its EMA12. Price strength was insufficient, making the low volatility more characteristic of a consolidation following a decline.

The width of the moving average cluster showed a similar state. At month-end, the cluster width was ~0.57% for BTC, ~0.63% for ETH, and ~0.58% for SOL, all below the 2.2% strategy threshold. This environment frequently triggers breakout signals. May's data confirms that following moving average cluster compression, allowing for dual-direction trading is essential. Only trading upward breakouts would systematically miss downtrends.

5. Strategy Backtest: 4H Moving Average Cluster Compression Breakout System

The strategy uses a cluster of six moving averages: EMA6, EMA12, EMA24, SMA6, SMA12, SMA24. The cluster width equals the difference between the maximum and minimum values of these six MAs, divided by the current closing price. If the cluster width of the previous candle is below 2.2% and the current candle closes above the cluster's upper band, a long position is opened at the start of the next 4H candle. Conversely, if the cluster width of the previous candle is below 2.2% and the current candle closes below the cluster's lower band, a short position is opened at the start of the next 4H candle.

Exit rules are fixed. A long position is exited when the price breaks below the EMA12; a short position is exited when the price breaks above the EMA12. The per-trade stop-loss is 2.5%, and the take-profit is 3R, i.e., 7.5%. If a take-profit and stop-loss are triggered on the same candle, the stop-loss takes priority. A round-trip transaction cost of 8bp is deducted. Open positions at month-end are closed at the close of the final 4H candle.

This report tests two strategy variants. The long-only version only trades upward breakout signals. The dual-direction version trades both upward and downward breakout signals. May's results show the dual-direction version was more suitable for the market state.

5.1 Long-Only Strategy: Declining Quality of Upward Breakout Signals

The long-only strategy largely failed. BTC executed 11 trades for a return of -5.36%, with a win rate of 18.2% and a maximum drawdown of -10.08%. ETH executed 10 trades for a return of -6.49%, with a win rate of 10.0% and a maximum drawdown of -10.64%. SOL executed 11 trades for a return of +0.91%, with a win rate of 18.2% and a maximum drawdown of -7.11%.

BTC's long-only profits were concentrated in the first two trades. An entry on May 1st and exit on May 4th yielded a net profit of +2.09%. An entry on May 4th and exit on May 7th yielded a net profit of +0.92%. Subsequently, signal quality deteriorated; a long trade initiated on May 14th hit its stop-loss, resulting in a net loss of -2.58%.

ETH's long-only performance was the weakest. A trade from May 1st to May 5th yielded a net profit of +3.17%. The subsequent 9 long trades all resulted in losses. ETH's upward breakouts were mostly weak bounces rather than trend expansions.

SOL's long-only strategy generated a small profit from two trades. An entry on May 5th and exit on May 8th yielded a net profit of +3.95%. An entry on May 8th, which triggered the 3R take-profit on May 10th, yielded a net profit of +7.42%. The remaining signals were mostly losing. SOL was the only asset this month with a positive return from the long-only strategy, and profits were highly concentrated.

5.2 Dual-Direction Strategy: Bearish Trend Legs Contribute Main Profits

The dual-direction strategy significantly improved results. The dual-direction strategy returned -2.83% for BTC, +3.14% for ETH, and +6.05% for SOL. The equally weighted dual-direction strategy across the three assets yielded +2.11%, compared to an equally weighted buy-and-hold return of approximately -6.09% over the same period.

BTC's dual-direction strategy still resulted in a loss, albeit smaller than the long-only version. BTC executed a total of 18 trades, with a win rate of 22.2% and a maximum drawdown of -10.74%. Two short trades contributed the most: a short entered on May 15th and exited on May 20th yielded a net profit of +2.35%; a short entered on May 26th and exited on May 30th yielded a net profit of +3.42%. False signals were frequent for BTC in mid-May, causing friction from repeated long/short switching.

ETH's dual-direction strategy returned +3.14% from 18 trades, with a win rate of 38.9% and a maximum drawdown of -8.26%. A key trade was a short entered on May 15th that triggered the 3R take-profit on May 17th, yielding a net profit of +8.03%. Another short from May 26th to May 29th yielded a net profit of +2.68%. Long signals for ETH were ineffective, making bearish legs the primary source of profit.

SOL's dual-direction strategy returned +6.05% from 22 trades, with a win rate of 22.7% and a maximum drawdown of -8.17%. SOL provided both bullish and bearish trend trades. A long trade from May 8th triggered the 3R take-profit on May 10th at 16:00, yielding +7.42%. A short trade from May 15th triggered the 3R take-profit on May 17th, yielding +8.03%. SOL exhibited the strongest trend elasticity but also the highest trading noise.

5.3 Trade Distribution: Low Win Rate Structure, Few Large Trades Determine Profit

Out of the total 58 trades in the dual-direction strategy, the number of profitable trades was limited. BTC's win rate was 22.2%, ETH's was 38.9%, and SOL's was 22.7%. Strategy profits came from a few large trend trades, while losses were controlled by the EMA12 exit and fixed stop-loss mechanisms.

Looking at cumulative profit per trade, the strategy