Bitcoin, the world's largest cryptocurrency, has been causing confusion among investors due to its volume and price fluctuations. The recent approval of spot ETFs, with a total of 11 being given the green light, had initially sparked optimism among bitcoin maximalists and crypto investors.
Supporters and advocates of these ETFs highlighted several reasons why they would be bullish for bitcoin. The anticipated inflows from institutional buyers and traders, the potential reactivation of dormant accounts, and the increased legitimacy of the sector were all factors that boosted market confidence and price predictions.
However, despite the positive sentiment surrounding the ETF approval, the reality has been quite different. In the first week of trading, the volume for these products surpassed $14 billion, making them the largest new launches of all time. Additionally, the bitcoin ETFs quickly made bitcoin the second largest underlying asset for ETF products, trailing only behind silver. With institutional buyers acquiring billions of dollars worth of bitcoin and the SEC's approval, one would expect the price of bitcoin to rise significantly.
Surprisingly, the opposite has occurred. Since the launch of these ETF products, the price of bitcoin has dropped by approximately 20%. This has led investors, regulators, and market commentators to question what factors may explain this contradiction. Let's examine some data that might shed light on this situation.
One factor that hangs over the crypto sector is the collapse of the FTX exchange and its subsequent impact on the market. It has been revealed that the FTX estate has sold over $1 billion of the Grayscale bitcoin ETF, accounting for nearly 50% of the total $2 billion sold by Grayscale investors since the ETFs started trading. This substantial selling pressure is seen by some as a significant reason for the drop in bitcoin's price. However, it's important to note that bankruptcy liquidations are rare events, so such selling is unlikely to be a recurring theme.
On a more positive note, J.P. Morgan recently issued a note indicating that selling pressure associated with Grayscale's GBTC instruments seems to be subsiding based on their internal research.
Another explanation often used in financial markets is the concept of 'buy the rumor, sell the news.' It appears that this adage is fitting the narrative around bitcoin's price movement. Interestingly, despite the negative sentiment and price decline, major traditional finance institutions such as Blackrock and Fidelity have emerged as the largest buyers of bitcoin during this market downturn. As the saying goes, they seem to be following the strategy of 'buying low and selling high.'
While it remains to be seen how prices will evolve throughout the rest of 2024, investors should be aware that significant buying is still occurring, even though prices have dropped.
One of the more straightforward explanations for the disparity between positive news and bitcoin prices is profit-taking. Bitcoin experienced a dramatic bullish move in 2023, prompting investors who may have been burned in previous bull markets to take profits and secure their gains. Moreover, the rise of stablecoins, which are less volatile than cryptocurrencies, has gained traction among both retail users and institutional investors. This suggests a growing interest in stable assets within the crypto space.
Bitcoin's volatility is not a new phenomenon, but investors should closely monitor the underlying trends driving recent market movements. While the price declines may be unsettling, it's crucial to consider the larger context and be aware of the factors influencing bitcoin's trajectory.
