Why Bitcoin is Losing Steam After the Launch of US Spot ETFs
Bitcoin, the world's most popular cryptocurrency, has been on a downward trend since the US Securities and Exchange Commission (SEC) approved the first batch of exchange-traded funds (ETFs) that invest directly in the digital asset on Jan. 11. The price of Bitcoin has dropped by about 20% from its peak of $49,021 on the day the ETFs went live to $39,990 as of Jan. 23, according to Coin Metrics.
One of the main factors that contributed to the sell-off was the unwinding of arbitrage positions in the Grayscale Bitcoin Trust (GBTC), which was converted from a closed-ended structure into an ETF. GBTC was one of the only ways for investors to gain exposure to Bitcoin before the launch of the spot ETFs, and it often traded at a premium or discount to its net asset value (NAV). This created an opportunity for traders to buy GBTC shares at a discount, borrow Bitcoin, sell it in the spot market, and lock in a profit when GBTC shares converged to NAV.
However, with the arrival of the spot ETFs, which track Bitcoin's price more closely and charge lower fees, GBTC lost its appeal and saw massive outflows. According to Bloomberg Intelligence, GBTC had $2.8 billion in net redemptions in the first six days of trading, while the nine new spot ETFs attracted $1.2 billion in net inflows. Among the sellers of GBTC was the estate of bankrupt crypto exchange FTX, which disposed of most of its shares in the trust.
Another factor that weighed on Bitcoin's price was the macroeconomic environment, which became less favorable for risk assets such as cryptocurrencies. The rising US Treasury yields, the strengthening US dollar, and the uncertainty around the Federal Reserve's monetary policy tightening have dampened investors' appetite for speculative bets. Bitcoin, which is often seen as a hedge against inflation and currency debasement, has lost some of its appeal as inflation expectations have moderated and real interest rates have increased.
The launch of the spot ETFs was widely anticipated as a catalyst for wider adoption of Bitcoin by institutional and retail investors, as well as a validation of its legitimacy and maturity as an asset class. However, some analysts have argued that the ETFs could also have a negative impact on Bitcoin's price in the short term, as they could increase market volatility, create selling pressure from miners and other holders who want to hedge their exposure, and reduce the scarcity premium of Bitcoin by making it more accessible and liquid.
In the long term, however, many experts remain bullish on Bitcoin's prospects, as they believe that the ETFs will eventually boost demand and awareness for the cryptocurrency, as well as spur innovation and competition in the crypto industry. Some analysts have even raised their price targets for Bitcoin, citing factors such as network effects, adoption curves, supply constraints, and valuation models. For instance, Standard Chartered predicted that Bitcoin could reach $120,000 by 2025.
Bitcoin is known for its high volatility and unpredictability, and it is not uncommon for it to experience sharp corrections after reaching new highs. The recent drop in Bitcoin's price may be seen as a healthy consolidation after a strong rally in 2021, or as a sign of weakness amid changing market conditions. Either way, investors should be prepared for more swings and surprises in the crypto space.