The recent approval of Bitcoin Exchange Traded Funds (ETFs) initially sparked widespread excitement, but the subsequent substantial collapse in Bitcoin prices left many puzzled. While the notion that the ETF approval was already factored into the market is a partial explanation, there are additional dynamics at play.
The approval of several Bitcoin ETFs by the US Securities and Exchange Commission (SEC) was hailed as a breakthrough, symbolizing the integration of crypto into traditional finance. Anticipation was high, with expectations that institutional capital flooding into the market would propel Bitcoin prices to new heights. Initially, this optimism seemed justified as Bitcoin’s value surged to approximately 49,000 dollars.
However, the celebration was short-lived as the price plummeted dramatically to 41,369dollars within a 24-hour period, leaving the market in a state of indecision.
Was the ETF launch a failure, or had potential investors already incorporated Bitcoin into their portfolios? The success of the ETFs, particularly the BlackRock-managed iBIT, indicated a positive response, with a record-breaking turnover of $4.6 billion on the first day of trading. Despite this success, skepticism from other asset managers, such as Vanguard, muddied the waters, highlighting concerns about cryptocurrency’s investment thesis and volatile nature.
So, why did the Bitcoin price decline despite the evident demand for ETFs? The answer may lie in the adage “Buy the rumor, sell the news.” Traders who had purchased Bitcoin in anticipation of ETF approval may have closed their positions once the news became official. This led to a cascading effect of selling, eroding the price gains made during the rumor-fueled rally.
However, another significant factor often overlooked is the “Grayscale effect.” The Grayscale Bitcoin Trust (GBTC), with the highest trading volume, differed from other ETFs. GBTC shares were essentially a recycled product, backed by real Bitcoins but tradable only on the secondary market. The approval of ETFs allowed Grayscale to convert its fund into an ETF, facilitating primary market trading.
On the first day of ETF approval, nearly $2.3 billion worth of GBTC shares changed hands. Importantly, these were existing shares rather than new securities based on recently purchased Bitcoins. This “Grayscale effect” introduced a flood of 600,000 Bitcoin-backed ETF shares onto the primary market, often traded profitably below market value.
Unlike the “Buy the rumor, sell the news” scenario, the Grayscale effect relies on tangible economic mechanisms and could dominate the ETF landscape for some time. However, its influence is expected to diminish over the coming months as the market adjusts to this new dynamic.
In essence, while anticipation played a role in the price drop, the Grayscale effect brought a more concrete element to the decline, contributing to a complex interplay of factors in the post-ETF approval Bitcoin market.