After several months of anticipation, the Bitcoin ETF finally got approved on January 10, 2024. The crypto space was filled with optimism, as the market saw several rallies in relation to the impending approval.
However, prices did not immediately surge as many anticipated. After the announcement, the king coin printed a doji and saw a more than 7% decline a few days later. The downtrend continued over the next twelve days as losses exceeded 17% before a rebound.
One reason for the downtrend is the massive outflow from various ETFs. Grayscale led the outflow, as many investors liquidated their positions following the nod. Outflows exceeded $400 million as prices plummeted.
Ethereum ETF Got its Nod
The same trend happened following the launch of the Ethereum ETF. The Security and Exchange Commission (SEC) gave the nod almost four months after Bitcoin’s. The market registered massive increases in the days leading up to the approval. ETH surged by over 23% during the last two days before the announcement.
However, the mega surge never came after the approval, and the largest altcoin trended within a horizontal channel over the next two weeks before it resumed its downtrends. It dropped by over 12% in the next two months and is yet to recover.
One reason for the decline was the massive outflows as investors liquidated their positions. Although not big, outflow exceeded $500 million in the first two weeks. The decline continued as prices followed.
In both cases, the massive outflow from ETFs is partly responsible for the massive decline in prices. Bitcoin lost over 4% last week and 10% the week before, with outflows exceeding over $700 million last week.
The bearish trend ended during the previous intraday session, ending the eight-day pattern. Prices were green in reaction to the inflows. The apex coin has gone up by over 3% since the week started.
We all celebrated the approval of ETFs for Bitcoin and Ethereum. While we celebrated, we focused on the positive aspects and failed to recognize the negative aspects.
All highlighted events show the massive impact of exchange-traded funds on the global crypto market. This is the dark side of ETFs.
The Dark Side of ETFs
Since the launch of both exchange-traded funds, the crypto market has been more susceptible to the effects of the world’s economy. This means these instruments have reduced cryptocurrencies’ edge over traditional stocks.
We’ve seen Bitcoin and Ethereum surge when traditional stocks suffered massive declines. The ability for the asset to surge amidst growing economic woes gave them an edge.
Investors would pull funds from other markets to increase their holdings in crypto and gain more protection against these crises that would cause a massive decline in major shares.
Since the introduction of exchange-traded funds, we’ve not seen this trend happen. The massive outflows the ETFs experienced were due to several scares from the global economy.
For example, Japan’s Central Bank raised interest rates last week, shaking the global economy. Following this news, US stocks shaded off over $1 trillion, heightened worries of the global economy falling into recession.
The losses were led by Oruka Therapeutics, Inc., which plummeted over 92%. Windtree Therapeutics, Inc. and Faraday Future Intelligent Electric Inc. also suffered substantial losses, down 60% and over 30%, respectively.
Even major stocks were affected, with Apple Inc. and Microsoft Corporation dipping almost 3% and nearly 2%, respectively. NVIDIA Corporation rounded out the top losers, with a decline of almost 10% in the previous 24 hours.
It is also worth noting that Ethereum liquidity dropped by over 20% since the ETF launch
How Bitcoin and ETH Reacted
Bitcoin initially shaded off almost 3% on September 3 due to the highlighted reason. The losses continued into the next three days, exceeding 6%. This was also the case with Ethereum.
The price decline continued as fear looms over the future of the world’s economy.
Price increases resumed this week as investors’ fears started dissipating. The anticipation of an interest rate cut is slowly replacing their other fears, and the global economy is improving, with traditional stocks recovering.
The Pros of Exchange-Traded Funds
Amidst the discontent over the effect massive exchange-traded funds have on the crypto market, there are some advantages to it.
Buying crypto directly from an exchange will require additional layers of security, which include buying cold storage or taking special care not to drop any hints that could lead to a wallet compromise. With an ETF, there is no need to possess the crypto asset, take care of keys, and manage movements to/from cold or hot storage facilities: all you need is to hold the fund’s shares, which you can access from any internet-connected device.
For the most part, buying an ETF is likely to be a lot easier for investors than purchasing and holding cryptocurrencies themselves.
Traders can also diversify their portfolios. Since crypto is in an asset class of its own, it becomes a new alternative type of investment, which will lead to higher portfolio diversification.
Others argue that the regulation is good for the crypto market and ETF offers a layer of regulation for the sector
Conclusion
I believe the trend is reversible as the crypto market will continue to bleed when economic issues arise. It has lost that edge due to the introduction of ETF
Yes, the ETF opened the crypto market to a broader audience. It also opened it to one more thing; losing its edge against traditional assets. It is worth noting that one reason for the consistent downtrend the market is seeing is the outflows from the highlighted instruments.
Why are these instruments seeing outflows? The growing fear of global recession is affecting investors. In previous time, they flood to the crypto market to edge against the upcoming decline. However, we’ve seen a significant shift in this behaviour since the said approvals.
These investors now view crypto ETFs as traditional stocks and are sitting on cash instead of investing directly in cryptocurrencies.
Will it change? NO! The SEC won’t withdraw their approval. What is the solution? Encourage direct investment in crypto. It will change the growing psychology among investors.
Will the market surge this year? Maybe. We expected the rallies to come rolling in the third quarter, but September is not that month. The fourth quarter? Maybe. It is heavily dependent on the world’s economy.
It is also important to note that US elections could impact the crypto market but short term.
Elendu Benedict | September 4, 2024