Bitcoin exchange-traded funds (ETFs) are facing a critical juncture as geopolitical tensions threaten to reverse recent inflows and tighten market liquidity, according to Alexandre Schmidt, a research analyst at CoinShares. While crypto ETFs have seen "healthy inflows month-to-date" after several weeks of outflows, Schmidt cautions that the sector's outlook is heavily dependent on the unfolding conflict in the Middle East.
The primary risk, Schmidt explains, is that a protracted conflict between Iran, Israel, and the US could trigger higher inflation via elevated oil prices. This scenario would likely "reduce the chances of rate cuts during 2026," leading to reduced market liquidity and fewer capital flows into assets like Bitcoin. This marks a significant shift in market expectations, as traders who once saw rate cuts as a foregone conclusion are now increasingly pricing in the possibility of central banks hiking interest rates in 2026—a development typically negative for risk-on assets.
Despite this macro headwind, Schmidt acknowledged a potential countervailing force: the conflict could increase Bitcoin's utility as a tool for moving capital out of affected regions like Iran. However, he does not expect this to drive major milestones in the near term. "Activity in Bitcoin and crypto is somewhat muted in relation to last year," Schmidt stated, adding that "breaking any significant milestones is unlikely in the near future."
Looking ahead, Schmidt identified Japan as a key market to watch for potential ETF growth. While newly elected Prime Minister Sanae Takaichi's crypto stance is unclear, Finance Minister Satsuki Katayama is known to have a positive view on crypto assets. Schmidt, having recently returned from meetings with Japanese investors, observed a "strong push to regulate crypto in the country and eventually launch ETFs there." He emphasized this would be a significant development, given the strong appetite for crypto among Japanese investors, particularly retail.
The analyst's comments come against a backdrop of volatile ETF flows. After heavy selling hit the sector in November 2025 and choppy flows toward year-end, the trend turned decisively negative in early 2026 with billions sold amid the new Middle East conflict. Data from DefiLlama shows the past four weeks have recorded inflows, but Schmidt warns that in a volatile world, "we always need to keep our minds open to sudden shifts in money flows and investor behaviour."
