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

Summary

• The crypto market in May experienced an initial rally at the beginning of the month, which transitioned into a mid-month decline and low-volatility consolidation towards the end. BTC, ETH, and SOL all formed local highs in the first ten days before entering a correction phase. Mainstream ETF demand weakened, perpetual trading volume remained high, and the market structure was characterized by spot market weakness and leverage-driven activity.

• The bidirectional moving average cluster breakout strategy performed best. The three-asset equal-weight buy-and-hold return was approximately -6.09%, the long-only strategy returned approximately -3.65%, and the bidirectional strategy returned approximately +2.11%. Profits were primarily generated from short-side trends in ETH and SOL, confirming that the May market was more suitable for directional 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 gains. The market remains in a phase of direction selection. Identifying market states, controlling risk, and executing on bidirectional signals is a superior trading framework compared to subjective trend-chasing.

The primary contradiction in the May crypto market was the divergence between spot market demand and leveraged trading structure after prices peaked early in the month. BTC, ETH, and SOL all formed local highs in the first ten days of May, followed by pullbacks and low-volatility consolidation. BTC fell from a 4H closing price of $77,117.4 at the start of the month to $73,684.0 at the 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%. SOL's closing price drop was smaller, but it reached an intra-month high of $98.40 before retracing to around $80.00, meaning actual trading volatility was significantly higher than the monthly change suggested.

The strategy backtest results for this month are clear. The three-asset equal-weight buy-and-hold return was approximately -6.09%; the long-only moving average cluster breakout strategy returned approximately -3.65%; and the bidirectional moving average cluster breakout strategy returned +2.11%. The bidirectional strategy achieved an excess return of approximately +8.2% compared to the buy-and-hold. Profits mainly came from the short-side trend legs after mid-May, with ETH and SOL contributing the most.

The effective trading framework for May was: first, identify compression in the moving average cluster; then, allow price to make a directional selection either upwards or downwards. Use the EMA12 to manage failed signals, a 2.5% fixed stop-loss to limit single-trade losses, and a 3R take-profit (3 * 2.5%) to preserve trend gains. This framework is suitable for a market structure like May's, characterized by low win rate, high reward-to-risk ratio, and concentrated trend legs.

Factors from the US stock market reinforced this assessment. In May, AI heavyweight stocks were supported by earnings and industry optimism. Nvidia reported strong quarterly results, with Q1 FY2027 revenue of approximately $81.6 billion, and its market cap briefly touched the $5 trillion milestone again. The correlation between BTC and the S&P 500 remained high, with public samples showing a 30-day correlation reaching as high as approximately 0.74 within 2026 and still around 0.6 near the end of May. Crypto assets did not break free from the US equity risk budget framework in May. Consecutive outflows from BTC ETFs, weakening demand for ETH ETFs, and an increased share of perpetual trading volume collectively led to crypto underperforming leading US tech stocks.

1. Market Structure: Initial Rally in Early May, Weakness Mid-Month, Low Volatility at Month-End

Phase one of May occurred from May 1st to May 6th. BTC rose from $77,117.4 to $82,828.2, ETH from $2,283.02 to $2,423.99, and SOL continued until May 11th, touching $98.40. During this phase, the short-term moving average cluster shifted upwards, volatility was in a controllable range, and the market showed characteristics of a corrective rally. SOL demonstrated leading elasticity, with funds willing to take on higher risk exposure early in the month.

Phase two began around May 7th. BTC failed to hold above $82,000, ETH could not sustain levels above $2,400, and SOL formed its monthly high near $98. Uptrend breakout signals began to fail frequently, with prices retracing to the EMA12 and repeatedly triggering exits. Long trades in BTC after May 14th hit stop-losses, long trades in ETH after May 6th continued to fail, and SOL entered a clear downtrend after May 15th.

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

The magnitude of intra-month drawdown verified the roles of different assets. BTC's maximum drawdown from high to low was approximately 12.5%, ETH's was about 18.8%, and SOL's was about 18.7%. BTC served as a risk anchor, while ETH and SOL acted as amplifiers for risk appetite. When BTC weakened, the retracement speed for ETH and SOL was faster, suggesting a need to reduce long exposure in high-beta assets at the strategy level.

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

As of May 31st, the total market capitalization of stablecoins across all markets was approximately $320 billion, with DeFi TVL around $251 billion. There was no systematic retreat in underlying dollar liquidity. CEX daily spot trading volume was about $124.2 billion, while CEX perpetual volume was approximately $894.4 billion, making perpetual volume about 7.2 times that of spot. Price discovery was predominantly handled by the derivatives market.

ETF flows became a significant source of pressure in the second half of May. Public news indicates that BTC spot ETFs experienced net outflows for 9 consecutive trading days, accumulating approximately $2.8 billion. This included a single-day net outflow of about $649 million, with BlackRock's IBIT alone seeing an outflow of roughly $448 million in one day. ETH ETFs also faced pressure, with net outflows of approximately $241 million in the last week of May.

However, capital did not completely exit crypto assets. Altcoin ETFs like SOL and XRP saw small net inflows, and new ETF narratives like HYPE garnered attention. Capital shifted from mainstream BTC and ETH ETFs towards niche thematic ETFs and higher-volatility assets. This structure indicates that the core issue was cooling demand for mainstream spot ETFs, with capital rotating into local themes and short-term trading.

Derivatives data was consistent with this. The active buy/sell ratio for BTC, ETH, and SOL was all below 1, indicating slightly stronger active selling pressure. The funding rate was approximately 0.01%, not reaching excessively crowded levels. The May market was in a typical state: active leveraged trading, insufficient spot market follow-through, weak active buying, making price breakouts prone to being false signals.

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

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

Core support for the US stock market came from AI and large-cap tech stocks. Nvidia reported strong quarterly results in May, with Q1 FY2027 revenue of approximately $81.6 billion. Its stock price hit an all-time high and briefly reached a market cap milestone of around $5 trillion. AI heavyweight stocks supported Nasdaq's risk appetite through confirmed earnings. Crypto assets lacked an earnings anchor of comparable strength, with prices influenced by ETF flows, derivative leverage, and liquidity expectations.

This cross-asset divergence impacted May's strategy results. US tech leaders had earnings to drive them, while mainstream BTC and ETH ETFs saw outflows, leading to a redistribution of capital within large risk assets. Traditional capital continued to buy AI leaders with higher certainty, reducing its willingness to allocate to BTC ETFs. Crypto long breakouts lacked spot market demand, causing volume-driven breakouts to easily turn into rallies that then fell back.

The macro data calendar in May also compressed risk budgets. Key data points during the month included NFP, CPI, PPI, the second estimate of GDP, and PCE. Employment, inflation, and growth figures directly influenced US Treasury yields, the dollar, and Nasdaq valuations, which in turn affected BTC ETF flows and perpetual funding rates. Towards the end of the month, the market was already focusing on early June data (Employment, ISM, JOLTS, ADP) as well as the FOMC meeting and options expiry window. The low-volatility compression in crypto occurring around these events is a logical explanation for position reduction and decreased risk budgets.

4. Volatility: Short-Term Compression Forms, Price Strength is Insufficient

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

Low-volatility compression usually signals that the market is approaching a directional choice, but it does not guarantee an upward breakout. At the end of May, BTC closed at $73,684.0, with its EMA12 around $73,776.35; ETH closed at $2,007.0, with its EMA12 around $2,016.34; SOL closed at $82.44, near its EMA12 of $82.39. BTC and ETH were still in a weak zone, while SOL had just returned to the EMA12 vicinity. Price strength is insufficient, making the low volatility more characteristic of consolidation after a decline.

The width of the moving average cluster tells a similar story. At the end of May, BTC's cluster width was about 0.57%, ETH's was about 0.63%, and SOL's was about 0.58%, all below the 2.2% strategy threshold. This environment tends to trigger frequent breakout signals. May's data confirmed that after MA cluster compression, bidirectional trading must be allowed. Trading only for upside 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, and SMA24. The width of the MA cluster is calculated as (Max of six MAs - Min of six MAs) / Current Closing Price. If the MA cluster width of the previous candle is below 2.2% and the current candle closes above the upper band of the cluster, a long position is opened at the open of the next 4H candle. If the previous candle's cluster width is below 2.2% and the current candle closes below the lower band, a short position is opened at the open of the next 4H candle.

Exit rules are fixed. Long positions exit when price closes below the EMA12. Short positions exit when price closes above the EMA12. The single trade stop-loss is 2.5%, and the take-profit is 3R, i.e., 7.5%. If take-profit and stop-loss are triggered on the same candle, the stop-loss takes priority. Round-trip transaction costs are 8bp. If a position is still open at the end of the month, it is closed at the closing price of the last 4H candle of the month.

This report also tests two strategy versions. The long-only version only trades upside breakout signals. The bidirectional version trades both upside and downside breakout signals. May's results show that the bidirectional version was more suitable for the market conditions.

5.1 Long-Only Strategy: Quality of Upside Breakout Signals Declines

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

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

ETH's long-only performance was the weakest. An entry on May 1st and exit on May 5th returned +3.17%. All subsequent 9 long trades were losing. ETH's upside breakouts were mostly weak bounces rather than trend expansions.

SOL's long-only strategy was slightly profitable, with gains from two trades. An entry on May 5th and exit on May 8th returned +3.95%. An entry on May 8th and exit on May 10th hit the 3R take-profit, yielding a net return of +7.42%. Most other signals were losing. SOL was the only asset with a positive return from the long-only strategy this month, with gains highly concentrated.

5.2 Bidirectional Strategy: Short-Side Trend Legs Contribute Main Profits

The bidirectional strategy significantly improved results. The bidirectional strategy returned -2.83% for BTC, +3.14% for ETH, and +6.05% for SOL. The three-asset equal-weight bidirectional strategy returned +2.11%, compared to a return of approximately -6.09% for the equal-weight buy-and-hold over the same period.

BTC's bidirectional strategy was still losing money, but the loss was smaller than the long-only version. BTC executed 18 trades with a 22.2% win rate and a max drawdown of -10.74%. Two short trades contributed the most: a short entered on May 15th and exited on May 20th returned +2.35%; a short entered on May 26th and exited on May 30th returned +3.42%. BTC had many false signals in mid-May, causing losses from frequent long-short switching.

ETH's bidirectional strategy returned +3.14% from 18 trades, with a 38.9% win rate and a max drawdown of -8.26%. The key trade was a short entered on May 15th that hit the 3R take-profit on May 17th, yielding a net return of +8.03%. A short entered on May 26th and exited on May 29th returned +2.68%. Long signals in ETH failed, so short-side legs constituted the main profits.

SOL's bidirectional strategy returned +6.05% from 22 trades, with a 22.7% win rate and a max drawdown of -8.17%. SOL provided both long and short trend trades on this strategy. A long entered on May 8th hit the 3R take-profit on May 10th at 16:00, yielding +7.42%. A short entered on May 15th hit 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 Returns

Across all 58 trades in the bidirectional strategy, winning trades were few. BTC's win rate was 22.2%, ETH's was 38.9%, and SOL's was 22.7%. Strategy profits came from a few major trend trades, while losses were controlled by the EMA12 exit and fixed stop-loss.

Cumulative per-trade returns