Two Weeks On, Bitcoin Falls Below $40K Despite SEC’s ETF Approval – What’s Driving the Decline?

The price of Bitcoin dropped under $40,000 for the first time since December as the approval of the spot Bitcoin exchange-traded funds (ETFs) continued to be a “sell-the-news” event.

It was on January 10th that the US Securities and Exchange Commission approved the 11 applications for Spot Bitcoin ETF after over a decade-long struggle. This landmark decision, expected to bring significant changes to the cryptocurrency market, was closely watched by investors worldwide. However, to much dismay of crypto investors, the BTC price is currently down about 21% since the ETF made its debut in the US market more than two weeks ago, which sent the BTC price to $49,000.

As per crypto data provider Santiment:

“Bitcoin briefly fell below $40K for the first time since December 4th. Monday has been a bloodbath for most of the crypto sector. Notably, there is 35% less discussion toward BTC and 21% less toward ETH compared to the prior ETF approval week.” 

The price of the crypto king started going down on Monday and continued its descent into the next day, which is yet to slow down. Many in the crypto sphere have been expecting Bitcoin's price to fall towards $38,000, which appears to be playing out. Technically, after a drop to $38k, Bitcoin has the 200-day EMA at $35,388. Echoing this sentiment, recent data from 10x Research indicates a shift in market dynamics, as it highlights that the trend had turned bearish for the first time since Oct., when the price was $27,530.

At the time of writing, BTC/USDT has been trading at $39,890, as per CoinGecko. As Bitcoin took a dip, altcoins fell even more heavily, with SATS, OKB, ORDI, OP, MNT, ASTR, HNT, FTM, and AVAX leading the 24-hour losses among the top 100 crypto assets by market cap. The only outlier was Bittensor (TAO), as, during this time, it had posted 24-hour greens of 10%, with its 7-day gains coming at 10.8%

Meanwhile, the total cryptocurrency market cap is at $1.59 trillion, down 5.6%. As a result of this, in the past 24 hours, 125,022 traders have been liquidated, with the total liquidation amount coming in at $330.16 million, as per Coinglass. 

Bitcoin accounted for about $94 mln of it while ETH for $71.54 mln. The largest single liquidation order was on Bybit for BTCUSD at $5mln. Meanwhile, most liquidations happened at Binance, with the majority of orders being liquidated over a long period.

During this period, Bitcoin's open interest (OI) fell by 4.43% to 436.51k BTC worth $17.06 bln. In April 2021, at its peak, the OI was $24.3bln.

The biggest drop was seen on CoinEx by over 19%, followed by Coinbase by 12.4%, then OKX by 9.15%, dydx by 6.45%, and then CME by 5.21%. CME's OI dropped to $4.4 bln after hitting a record high at $6.4 bln on January 12th.

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What's Behind This Drawdown? 

The latest correction came despite the sizable inflows into new spot ETFs as selling overpowers the buying in the market.

As several spot Bitcoin ETFs began trading on January 11th, Bitcoin surged to a two-year high, but it didn't last long, as the price has been heading south ever since. Despite being at its weakest price since the beginning of December, Bitcoin's price is still up 149% since the Nov. 2022 low.

The primary reason for the ongoing selling is Grayscale's Bitcoin Trust (GBTC), which is seeing a multi-billion dollar outflow. Investors are rushing out of Grayscale's GBTC product to finally take profits or move to other lower-cost vehicles. 

Prior to the ETF launch, GBTC was holding nearly 620,000 BTC, which had fallen to 552,681 BTC on January 22nd, as per the Grayscale website. Even still, GBTC is trading at a discount, though at a mere 0.11% compared to the astronomical 48.89% in mid-Dec. 2022, ​​as per YCharts.

This discount to NAV indicates continued outflow. However, the declining discount may not be due to a slowdown in outflow but rather due to improvements in MM/AP operations, noted BitMEX Research.

In addition to GBTC's outflows, existing spot Bitcoin ETFs in Europe and Canada, along with futures-based ETFs like ProShares' (BITO), are seeing money flowing out of their products.

Unlike Grayscale and other investment vehicles, recently launched spot products in the US are seeing an inflow of fresh capital, with BlackRock's IBIT and Fidelity's FBTC having already surpassed $1 billion in assets under management (AUM). 

Overall, according to BitMEX Research, BlackRock continues to win the race so far, with its AUM now coming in at nearly $1.69 bln, followed by Fidelity at $1.44 bln and Bitwise at $492 mln. Over this 7-day period, GBTC has seen a negative flow of $3.44 bln, which puts the total flows at a positive $1.089 bln.

The thing is, on Monday, the combined inflows could not overcome GBTC's outflow of a record $640.5mln, and the sizable sales of bitcoin from the mammoth GBTC have sent prices lower.

So, Who's Selling & Why?

As we pointed out above, Grayscale's fund has been recording some major outflows that other products haven't been able to compensate for. But why are GBTC holders selling? It is GBTC's structure that is to blame, which prevented its holders from selling their shares up until the trust's conversion to an ETF, giving its holders the option to finally take a profit.

While GBTC's closed-end structure was one big problem, another one has been GBTC's 1.5% management fee, which is much higher than the competitors, who have been competing on fees with some slashing below the industry standard and even waiving fees for a specific period.

Currently, Bitwise Bitcoin ETF (BITB) has the lowest at 0.20%, which was waived for the first $1 billion in fund assets. After Bitwise, Ark 21Shares Bitcoin ETF (ARKB) charges 0.21%, then BlackRock's iShares Bitcoin Trust (IBIT) at 0.25%, which has its fee reduced to 0.12% for the first 12 months of trading or first $5 bln in assets, whichever comes first. Fidelity Wise Origin Bitcoin Fund (FBTC) meanwhile charges 0.25%, which is waived until August 1st, 2024.

So, while other investment vehicles have been lowering their fees even further to compete, Grayscale has left its high fees untouched, prompting many to depart and park their funds elsewhere. 

According to the latest reports, the bankruptcy estate for failed crypto exchange FTX has been behind the majority of GBTC selling. The FTX estate sold all of its 22 million shares of GBTC, equivalent to about 20,000 BTC, for about $1 bln. This presents a bullish picture, i.e., the majority of the inflows into the new Spot Bitcoin ETFs have been fresh investments and not recycled funds from GBTC chasing low fees.

After selling $1 billion in GBTC shares, Alameda Research, the sister firm of FTX, also dropped its lawsuit, which was filed early last year against Grayscale Investments. The lawsuit alleges over $9 bln became trapped in GBTC following the exchange's collapse and that the fund charged excessive fees.

With FTX done selling its substantial holdings, it's a possibility that the selling pressure could ease, but GBTC still has more than 500k BTC, and if it doesn't lower its fees, investors would likely move to better opportunities. 

What's the Macro Situation Like? 

In contrast to the red crypto market, US stocks continue to edge higher, with both the S&P 500 and Dow making new highs. The S&P 500 went on to hit 4,868.41, its first record close since January 2022, and is currently at 4,850.43. Meanwhile, the Dow Jones Industrial Average closed above the 38,000 level for the first time ever. 

These latest gains came on the back of a positive investor outlook on the health of the economy. Moreover, investors are bullish on AI and are looking to earnings for signs of an AI boom. In tech earnings results, Tesla (TSLA) and Netflix (NFLX) will be releasing their quarterly results later this week.

However, there are only a handful of stocks, seven to be exact, that are driving the S&P 500 rally. These stocks belong to tech giants, viz. Meta, Nvidia, Apple, Amazon, Alphabet, Microsoft, and Tesla jumped more than 110%. During this time, chipmaker Nvidia (NVDA) and Meta (META), which rose past $600 and $390 respectively, made fresh ATHs.

Last month, Goldman Sachs lifted its target for the S&P 500 to 5,100 by this year's end, citing declining inflation and rate cuts. While the broad crypto market has been diverging from the macro, these factors will likely send both stocks and crypto upwards. However, investors have been scaling back their aggressive policy-easing expectations after several officials made hawkish comments, noting that it was too early to consider interest rate cuts.

Later in the week, the Federal Reserve's preferred inflation gauge will give insight into when the central bank will pivot to cutting interest rates. As for the policymakers' next meeting, it will be held on January 30-31, 2024. At its previous FOMC meetings, the Fed held rates steady at 5.25%-5.50%. 

As for gold, the safe haven asset is currently trading strong at $2,025, slightly down from its highs in early December and much higher than its $1,810 low in Oct. last year. The conflict in the Middle East, which is not showing any signs of easing, along with worries about a slowing economic recovery in China, has been benefiting the precious metal.

China is currently considering a rescue package of 2 trillion RMB ($278 billion) in order to reboot its struggling stock markets. Beijing is reportedly planning to use offshore accounts of Chinese state-owned companies as well as local funds to purchase stocks onshore through Hong Kong markets. The move that will boost liquidity and confidence in the mainland stock market is pending top leadership approval. Chinese Premier Li Qiang also recently emphasized the need to establish more forceful measures to reboot the economy.

These measures to support the yuan from China, which has banned all crypto-related activities to discourage capital flight, could negatively impact Bitcoin's price. 

Meanwhile, the DXY is currently in the green at 103.275, up from 100.6 late in Dec, with a rising 10-year bond yield acting as a tailwind. A strong dollar is not favorable to the leading cryptocurrency. 

What's Next?

For starters, the correction was expected given that the BTC price had surged about 70% since August, when a federal court forced the SEC to review its decision to reject Grayscale's application to convert its Trust into an ETF.

This slump wasn't unexpected as many were calling out for a dump in the light of the Bitcoin ETF approval as seen during the previous major events — the initial public offering (IPO) of crypto exchange Coinbase in April 2021 and the launch of Bitcoin futures in Dec. 2017.

Also, despite the flush, the Crypto Fear & Greed Index is comfortably in neutral territory with a reading of 50 on a 1-100 scale. Corrections are further healthy after a market has experienced a good run-up.

Now, the ETF is expected to see tons of attraction, with inflows projected to reach $10-$100 billion and send Bitcoin upwards. After all, the ETF has made Bitcoin accessible to a wide range of investors who either don't want to or can't have custody of the physical asset. But this will take time and won't be immediate. So, now that the ETF mania phase is over, the market is looking for the next catalyst. 

In the next step, the SEC is currently reviewing applications from Nasdaq and Cboe Global Markets to introduce options trading for Bitcoin ETFs. While Cboe is aiming to launch options on several Bitcoin ETF products, Nasdaq is only going for BlackRock's Bitcoin trust, IBIT. According to market analysts, the regulator can approve these new offerings as early as late February and, if not, then Sept., depending on the agency's assessment.

Then there's a potential Ethereum spot-ETF that the market is eagerly anticipating for approval as the next big event for crypto.

However, the biggest upcoming event, of course, is halving in the first half of the year. The event that occurs every four years will cut down the Bitcoin miners' reward in half. This halving will reduce the block reward from 6.25 to 3.125, effectively reducing the rate of new Bitcoin issuance by 50%. Historically, Bitcoin price has increased significantly in the months following each halving. To put this into perspective, the last event occurred on May 11th, 2020, when the price was under $10k.

In preparation for this big scheduled event, miners have been accumulating Bitcoin, with miner reserves increasing by 6,562 BTC in the past couple of days. This brought the total miner reserves to 1.834 million BTC. 

Another positive signal is coming from small investors who have also been securing their bags. According to the data provided by Glassnode, the Shrimp Cohort, the smallest entity with less than 1 BTC, “continues to aggressively accumulate Bitcoin.” These entities have been buying Bitcoin at the pace of over 23.7K BTC every month, bringing the total supply held by these small investors to 1.38 million BTC.

In addition to all this, the Aggregate Stablecoin Supply has also been experiencing an expansion since Oct. 2023. Recently, it recorded a monthly increase of over $4bln, the biggest influx since March 2022, putting the Aggregated Stablecoin Market Cap at $128 bln.

Amidst all this, crypto adoption is also going strong, with the number of worldwide crypto users rising by 34% to an estimated 580 million people in 2023, as per a Crypto.com report. As per the report, Bitcoin ownership has increased by 74 million to 296 million users and Ethereum's by 35 million to 124 million. 

“Crypto adoption in 2023 achieved new milestones, in spite of macro headwinds,” stated the report.

Meanwhile, the global crypto user base projected by Bitfinex in its Dec. 2023 report is estimated to increase to 950 million people by 2024-end.

In the short term, it's to be seen if the market will see more downside or if some recovery is imminent, but in the long term, halving and continued accumulation through ETFs and direct buying translates to higher prices!

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