Cryptos: Why Did Spot Bitcoin ETF Approval Cause Prices to Decline?

The cryptocurrency markets had waited years for the SEC to approve a spot Bitcoin ETF. In late 2017, Bitcoin began trading on the Chicago Mercantile Exchange (CME), ushering in the first regulatory validation of the leading cryptocurrency.

Bitcoin prices had been rallying into the January 10 announcement, reaching over $49,000 per token on January 11, the highest price since December 2021. However, prices have decreased after eight spot ETFs began trading, as the approval came with no endorsement and many warnings. 

Bitcoin rallies from the 2021 lows

Bitcoin exploded to a record high of $68,906.48 in November 2021, when the leading cryptocurrency ran out of upside steam. 

As the chart highlights, the corrective plunge took Bitcoin 77.5% lower to $15,516.53 in November 2022, where it found a bottom. Bitcoin has made higher lows and higher highs since late 2022, rallying 216% to the latest January 2024 $49,021.86 high. The most recent leg to the upside came over speculation the SEC would approve a spot Bitcoin ETF product. 

The SEC approval launches eight spot Bitcoin ETFs

After the stock market closed, the SEC approved ETFs that invest directly in Bitcoin on January 10, 2024. The market wasted no time rolling out products, with eight coming to market on January 11. The eight ETFs that hold Bitcoin are GBTC, BITB, FBTC, EZBC, BTCO, BRRR, HODL, and BTCW. While the ETFs have different expense ratios, GBTC is the most liquid product.  At $35.63 on January 24, GBTC had over $27 billion in assets under management. GBTC trades an average of nearly 19 million shares daily and charges a 1.50% management fee. Liquidity is critical for investors and traders, providing the tightest bid-offer spreads and the most correlation to volatile Bitcoin prices. 

A qualified approval- Chairman Gensler issues a stern warning

SEC Chairman Gary Gensler did not endorse Bitcoin and cryptocurrencies in his statement following the regulator’s spot Bitcoin ETF approval. His comments were more a warning than an endorsement:

While we approved the listing and trading of certain spot Bitcoin [Exchange Traded Product] ETP shares today, we did not approve or endorse Bitcoin. Investors should remain cautious about the myriad risks associated with Bitcoin and products whose value is tied to crypto.

Though we’re merit neutral, I’d note that the underlying assets in the metals ETPs have consumer and industrial uses, while in contrast, Bitcoin is primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering… sanction evasion and terrorist financing.

Source: riabiz.com

Chairman Gensler had to balance opposition from many legislators with regulatory approval. The move comes with an element of validation, encouraging more market participation from investors who can now have direct exposure to Bitcoin in standard equity accounts. However, governments and central banks worldwide are likely to hold onto control of the money supply and refrain from surrendering it to cryptocurrencies any time soon. If the market cap of the cryptocurrency asset class increases significantly, expect legislative bodies and leaders to increase regulation and, in some cases, restrict or even ban using cryptos. 

GLD is a model- The case for higher Bitcoin prices over the coming months

Many investors and traders believe Bitcoin is the new gold, and the highly successful GLD ETF is a model for GBTC and other spot Bitcoin products. GLD made gold investing more accessible for a vast addressable market. Since GLD’s introduction in November 2004, gold prices have made higher lows and higher highs in a rally that continues in 2024. 

The SEC’s validation could be a long-term bullish factor for Bitcoin, but the price action before and following the approval was a buy-the-rumor and sell-the-fact event as of January 25. Ironically, Bitcoin’s price action followed the same path after the first regulatory approval in late 2017 when the CFTC approved Bitcoin futures on the Chicago Mercantile Exchange. 

 The monthly chart above shows Bitcoin prices rallied to just below $20,000 in December 2017, a new record peak then, before falling below $3,200 per token in December 2018. As an aside, the CFTC chairman in late 2017 was Gary Gensler, who went on to be the SEC chairman who approved the spot Bitcoin ETF in early 2024.  

The case for concerns- Only invest what you can afford to lose

Heeding Chairman Gensler’s cautionary message is a crucial warning for investors. The potential for significant rewards in Bitcoin and all cryptocurrencies comes alongside substantial risks. The explosive and implosive price history is why investors and traders should only invest capital they are willing to lose. 

While there is a compelling case for global currencies that governments do not influence, remember the most powerful aspect of governing is the control of purse strings. Control of the money supply is essential for governmental power. 

While the trend is always your best friend and remains bullish, the future remains uncertain, with as many detractors as supporters of the highly volatile asset class. Expect lots of volatility in Bitcoin and cryptocurrency markets. The asset class’s market cap stood at $1.56 trillion on January 24, 2024. Apple, Microsoft, and Alphabet, and Amazon had higher market caps, and the crypto asset class had virtually the same value as NVDA. The higher the value of cryptos rises, the more the odds of governmental moves to restrict the asset class rise. 

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