The launch of the first spot bitcoin exchange-traded funds (ETFs) in the United States last week was a watershed moment for the cryptocurrency industry. Yet shortly after the ProShares Bitcoin Strategy ETF (BITO) and Valkyrie Bitcoin Strategy ETF (BTF) began trading on Thursday, bitcoin witnessed a sharp sell-off, plunging from a 2-year high above $49,000 down to $41,500 over the weekend.
The extreme volatility highlights why many analysts had warned that the ETF launch could end up being a “sell the news” event if the approval was already priced in to bitcoin’s rapid gains this year. The 40% price surge in the first two weeks of 2024, as anticipation built ahead of the ETFs, supported those fears.
“Sell the news” refers to how asset prices often run-up going into a highly anticipated event, only to tumble shortly after as traders quickly take profits. The ETF hype turbocharged this dynamic.
Bitcoin’s plunge liquidated an estimated $112 million worth of leveraged long positions on Thursday when prices cratered from $49,000 to $46,000 in minutes. The volatility subsided on Friday but reignited Saturday. Prices broke below $44,000 Saturday morning before a flash crash Saturday night took bitcoin down to nearly $41,500, its lowest level since mid-December.
While painful for speculators caught on the wrong side of the trades, analysts say the correction was likely inevitable given bitcoin had surged 150% over the past year and 57% in 2023 alone leading into the ETF launch. The parabolic ascent was overstretched by most technical measures.
“A correction to at least $40,000 per bitcoin would be within bounds of typical corrections given bitcoin’s price performance of over 150% over 2023,” said Alex Kuptsikevich, analyst at trading firm FxPro.
Kuptsikevich and others believe $40,000 represents the next key support level if prices continue sliding lower this week. That level could attract fresh buying from longer-term investors who missed bitcoin’s rally over the past year.
So while the ETF launch sparked a frenzy of speculative trading and leverage that proved unsustainable, analysts say demand from institutional investors for direct bitcoin exposure remains strong regardless of the latest bout of volatility. The ability to gain exposure through regulated ETFs traded on major stock exchanges makes bitcoin far more accessible to pensions, endowments, retirement accounts and other large investors that were previously restricted from buying the cryptocurrency directly.
Lower U.S. Treasury yields and optimism that inflation has potentially peaked, paving the way for the Federal Reserve to cut interest rates by early 2025, could also support bitcoin prices over the longer run despite the post-ETF hangover, according to bitBank analysts.
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Author: Oliver Dale