Why Bitcoin Prices Dropped by 20% if the Spot Bitcoin ETFs Are So Promising?

Since the SEC's historic approval of Spot Bitcoin ETFs on January 10th, Bitcoin's price has experienced a sustained decline with the positive news finally putting its boots on the ground. The price even touched a low of $38,505 on this Tuesday, down around 20% from its peak earlier this year.

Against this backdrop, the first batch of Spot Bitcoin ETFs was approved as expected in January, which is one of the most important positive news for Bitcoin's surge at the end of last year, providing an excellent opportunity for investors who are eager to take profits. Thus, short-term panic selling accelerated, which explains why market sentiment quickly turned to "sell the news" after a brief period of optimism.

According to data from alternative.me, cryptocurrency investors are currently becoming more cautious, and trading enthusiasm has declined. On January 25th, The Fear & Greed Index for Bitcoin and other large cryptocurrencies dropped to 52, and market sentiment shifted from "Greed" to "Neutral".

Some analysts have pointed out that the closing out of positions by traders in the Grayscale Bitcoin Trust Fund (GBTC), which recently converted from a closed-end trust fund to an ETF in January, has intensified the selling pressure on Bitcoin, exacerbating the recent sharp decline in its price.

As the largest spot Bitcoin ETF in the world, GBTC has consistently dominated trading volume. Therefore, the impact of its fund outflows on Bitcoin prices cannot be ignored. According to compiled data disclosed by BitMEX Research on the X platform, as of January 24th, GBTC had a cumulative net outflow of $4.392 billion during the 9 trading days since its conversion to an ETF.

According to sources familiar with the matter, the bankrupt cryptocurrency exchange FTX, which filed for bankruptcy in November 2022, is selling off most of its assets, including a significant portion of its holdings in Grayscale Bitcoin Trust ETF, to pay off its creditors. Marex Capital Markets, a brokerage firm, has reportedly sold over two-thirds of the 22.28 million shares of FTX stock it held, as cited by Bloomberg's sources.

The exit of FTX positions has accelerated the outflow of funds from GBTC. Nevertheless, Sean Farrell, Head of Digital Asset Strategy at Fundstrat Global Advisors LLC, suggests that the disposal of FTX may alleviate supply glut, thereby indicating that the strong selling pressure from GBTC may soon dissipate.

Despite initially trading at a premium to its net asset value or the value of the bitcoin it holds, the trust fund had already shifted to trading at a discount in 2021. According to YCharts data, its trading price in December 2022 was discounted by as much as 49% relative to its net asset value. This has enabled investors who purchased GBTC fund at a significant discount to net asset value to realize their gains by fully exiting the bitcoin space through the conversion to an ETF.

Chief economist at Bit Mining, Youwei Yang, explains the selling of Grayscale investors as“their double profits: one being the negative 40% conversion rate to become zero, and the other being the significant price increase of bitcoin over the last year.”

However, this does not account for the decline in bitcoin prices, as the redemption volume of GBTC exceeds the total inflow of all other US spot ETFs. This indicates that more funds flowing out of Grayscale's GBTC are choosing to sell their holdings for profits instead of transferring them.

Despite the short-term correction, some analysts remain bullish on the long-term prospects of bitcoin. This is not only due to the expected dissipation of strong selling pressure from the disposal of FTX, but also the anticipated boost to prices from the upcoming so-called halving event in April, the gradual increase in funds flowing into other bitcoin ETFs, and the expected easing of Fed’s monetary policy this year.

"For stocks, a 20% pullback typically indicates that a bull market is over; But in bitcoin, it’s not unusual to have a 30% pullback in a bull market," said Peter Eberle, chief investment officer at crypto investment firm Castle Funds.

Kruger at LMAX Group explains from a technical indicator perspective that bitcoin's slide below $40,000 "has opened the door for the possibility of a deeper correction, which could take us as far as back down towards previous resistance in the $32k; However, if we do see setbacks extend this far, we believe this should be the extent of the pullback before the market once again looks to find its legs, and turn back up, for the next major upside extension and bullish continuation beyond $50k and towards a retest of the record high."

Not everyone shares the same optimistic view, as some voices place greater emphasis on the complexity of the current global macroeconomic conditions and the potential risks that may exist. They also point out that it remains uncertain whether bitcoin spot ETFs can win the approval of institutional investors such as pension funds and investment investors.