Bitcoin EFTs: Sell the News Event

The launch of the long awaited Bitcoin EFTs on January 11, 2024, was a surprise to many crypto investors who were expecting BTC to see the cryptocurrency skyrocket. Instead, according to data from The Block, the price of the largest cryptocurrency in the world by market capitalization dropped below $39,000 on Jan 23, 2024. 

So what happened? That is more clear now that the dust has settled.

The losses occurred after analysts from JPMorgan, under the direction of Nikolaos Panigirtzoglou, stated that if investors in Grayscale’s spot ETF—a conversion from its flagship GBTC fund—continue to take profits, there may be more negative pressure on the price of bitcoin in the upcoming weeks.

Recently, some of the downward pressure on Bitcoin’s price can be linked to the FTX bankruptcy estate selling about 22 million shares of Grayscale’s GBTC. This information was reported by CoinDesk. The on-chain analysis firm CryptoQuant was one of the few voices suggesting that the approval of the ETF (Exchange Traded Fund) could result in a sell-off as people react to the news.

On January 17, GBTC experienced withdrawals of $451 million, as per The Block’s Data Dashboard. Prior to Thursday, total outflows were at least $1.6 billion, according to the data.  

Grayscale’s GBTC remains the largest holder of bitcoin among all spot ETFs, owning 53% of the market share. However, this significant holding was obtained during its time as an investment trust before converting to an ETF. Recently, since becoming an ETF, GBTC has experienced a net outflow of 66,500 BTC (approximately $2.6 billion at current market prices). This is likely because the high fees associated with GBTC have motivated investors to switch to alternative options with lower fees.

Based on updated data, in their first week of operation, the new spot ETF providers have added over 68,000 bitcoin. However, nearly 40,000 bitcoin have been lost on Grayscale’s GBTC, leaving a net gain of roughly 28,000 in bitcoin ETFs.

Vetle Lunde, a research analyst at K33, stated that a large number of spot bitcoin products were already being traded globally far in advance of U.S. regulatory permission. He said that exchange-traded products (ETPs) presently hold more than 864,000 bitcoin globally, which puts the comparatively small addition of the U.S. vehicles into perspective.

Lunde continued by saying that significant withdrawals from Canadian and European ETPs have occurred within the previous week as investors have taken profits or deposited money, in addition to the GBTC departures.

The ProShares Bitcoin Strategy ETF (BITO) is another option; as of late, it manages assets worth over $2 billion. This futures-based exchange-traded fund (ETF) does not hold bitcoin, but according to Lunde, it makes up 36% of the open interest in bitcoin contracts at the CME Group’s market. He continued, saying that 48% of all bitcoin open interest at CME is made up of futures-based bitcoin

According to Lunde, BITO and the other futures-based funds must close (sell) their long positions in the futures market as a result of outflows, which might further pressure bitcoin prices.

Bitcoin’s recent drop may have been influenced by miners selling their bitcoins, similar to what happened a few months before the May 2020 Halving, according to Di Giacomo. The upcoming Halving in April 2024 will reduce the rewards for mining bitcoin. Anticipating potential changes in the digital asset’s value, miners seize favorable price opportunities to speed up their sell-offs. This excess supply could contribute to pushing the price downward, explained the analyst.

The South Trending Bitcoin Fear & Greed Index

On Friday, the Bitcoin Fear & Greed Index dropped from 63 to 49. Notably, the Index moved from the zone of greed to the neutral zone. The declining trend points to more Bitcoin losses before a gain.

At $40,000, Bitcoin might be put to the test. Strong buyer demand, nevertheless, might indicate the beginning of a fresh surge at $40,000.

U.S. Government Plans $118 Million Bitcoin Sale

On January 24, a notice circulated on social media, revealing that the U.S. government intends to sell 2,934 bitcoins. This decision follows the January 8 sentencing of Ryan Farace, a dealer linked to Silk Road Xanax, and his 72-year-old father Joseph Farace for their involvement in a money laundering conspiracy.

Some community members expressed worries that the auction might cause a significant Bitcoin sell-off. However, Steven Lubka, managing director at the Bitcoin exchange Swan Bitcoin, and others argued that the sale would be relatively small compared to the recent outflows from the Grayscale Bitcoin Trust in the past week.

Since converting to a spot Bitcoin exchange-traded fund on January 11, the GBTC has sold 106,575 BTC, equivalent to $4.2 billion. The most recent outflow occurred on January 24, amounting to 10,871 BTC.

The U.S. government has a history of occasionally auctioning Bitcoin. One notable instance was in 2014 when venture capitalist Tim Draper participated in an auction and acquired almost 30,000 BTC. In more recent times, the government has shifted to selling seized cryptocurrency on exchanges instead of through auctions. The most recent recorded sale involved 9,118 BTC in March 2023.

Bottom Line

“Sell the news” is a common phrase in financial markets and describes how asset prices, leverage and sentiment push prices higher in the lead-up to a bullish event, only for prices to tumble shortly after. 

The expected approval of spot bitcoin ETFs in the U.S. was already anticipated and factored into the prices. Analysts from the Japanese crypto exchange bitBank believe that this event is likely to cause a temporary high or peak in the price in the short to mid-term.

The majority of GBTC profit-taking has already occurred,” stated analysts led by market strategy managing director Nikolaos Panigirtzoglou in a market report on January 25. This suggests that much of the selling pressure on Bitcoin from that source should now be mostly over.

According to JPMorgan analysts in their note, BlackRock and Fidelity’s spot Bitcoin ETFs are considered “emerging competitors” to GBTC. Each of them has accumulated assets under management of $1.9 billion and $1.8 billion, respectively.

On January 24, the amount of money flowing into BlackRock’s spot Bitcoin ETF was the lowest since its launch, totaling only $66.2 million on that day. Despite the low inflow, the ETF increased its Bitcoin holdings by 1,663 BTC, bringing the current total to nearly 45,700 BTC.

On January 24, Fidelity’s ETF acquired an additional 3,170 BTC, bringing its total holdings to 41,319 BTC.

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