As 2024 began, the price of Bitcoin experienced a rollercoaster ride with the introduction of 10 new Bitcoin exchange-traded funds (ETFs) in the US market. This event caused market chaos but holds significant historical significance. During this period, the price of Bitcoin reached new highs and lows for the year. However, there is no doubt that Bitcoin is welcoming the entry of traditional finance into its world.
Summary
The approval of ten new Bitcoin spot ETF products by the US Securities and Exchange Commission (SEC) led to a historic week of chaos for Bitcoin investors. The price of Bitcoin reached new highs and then dropped to its lowest point for the year over the weekend, with a sell-off of 18%. This was driven by profit-taking from derivative leverage and spot positions.
Several indicators reached levels seen during major resistance in previous cycles, leading long-term investors to sell approximately 75,000 Bitcoins for profit-taking.
In just two weeks, 2024 has proven to be a real rollercoaster ride for Bitcoin investors. The approval of 10 Bitcoin spot ETF products by the SEC for trading in the US market can be considered one of the most significant financial product launches in history.
In many ways, Bitcoin has successfully brought the traditional financial world and US regulatory agencies into its notorious world of chaos and volatility. On January 9th, a mix-up occurred with news of the ETF approval after the SEC’s social media account was hacked, and false approval notifications were released by the hackers. This news caused the price of BTC to soar to $47,200, but as authoritative denials arrived, the price quickly dropped back to $44,500.
The second mix-up occurred on January 10th when the actual SEC approval document was leaked from the SEC’s official website before the US market closed. However, all ten ETF products were ultimately approved and began trading on January 11th.
The price of Bitcoin reached new highs, just below $48,800, due to this development. However, it then dropped 18% over the weekend, falling to $40,000 during traditional market closures, marking a new low for the year. Nevertheless, Bitcoin continues to welcome Wall Street into its world.
Bitcoin Spot ETF Launch
In the first two days of trading, the total trading volume for spot ETFs reached $7.823 billion, with assets under management exceeding $1.4 billion. This surpassed the outflow of $579 million from the GBTC ETF product currently trading, as investors reallocated investments after years of holding. The reason behind this is that the latter performed poorly as a closed-end fund during its period (ETF fees are capped at 1.5%, lower than 2.0%).
Despite the outflows, GBTC remains a giant in the on-exchange ETFs, with a trading volume of $4.166 billion, accounting for 57% of the total trading volume in the two days. In the coming weeks, funds are likely to continue to circulate and shuffle internally within GBTC.
The absolute scale of GBTC compared to other ETF products can be seen in the graph below. Despite the outflows, their massive holding of 617,080 BTC still outshines their competitors, and the liquidity conditions remain attractive for any trader or investor sensitive to market liquidity and depth.
Just two trading days later, the US spot ETF products currently hold a total of 644,860 BTC (approximately $27.2 billion), accounting for 29.7% of the global ETF holdings.
Overall, the trading volume and assets under management have made this one of the largest and most significant ETF launches in history, marking the end of the beginning for Bitcoin’s maturity and growth.
News Hype?
Whether it’s the halving, ETF launches, or another Thursday coming, Bitcoin investors enjoy debating how these events are discounted in the “market pricing” way. Despite the significant volatility along the way, the price of Bitcoin has remained relatively flat since the beginning of the year, indicating that the pricing of this particular event has been nearly perfect.
Of course, there are key driving factors behind the mid-term volatility. Since mid-October, open interest (OI) in the futures and options markets has significantly increased:
BTC futures OI (yellow) increased by $7 billion (+66%), with $1.1 billion being flushed out of the market this week.
BTC options OI (blue) increased by $6.6 billion (+70%), with $2.3 billion being cashed out due to contract expiration and closing.
It is important to note that the open interest in both markets is still close to multi-year highs, indicating an increase in leverage and becoming a more dominant force in the market.
The chart below shows an oscillating indicator of the percentage change in futures open interest. This tool can be used to identify periods of rapid changes in overall market leverage.
(Red) High values indicate an increase in OI of +2 standard deviations.
(Blue) Low values indicate a decrease in OI of -2 standard deviations.
We can see that a significant deleveraging event occurred on January 3rd, with nearly $1.5 billion of OI being liquidated in a single day. Conversely, as speculative activity in the ETF peaked, OI increased significantly from January 9th to 11th, with prices approaching $49,000.
With the entry of new ETF holders into the 24/7 trading environment of Bitcoin, OI prices fell to $40,000 over the weekend due to sell-offs.
The perpetual funding rate has also remained strongly positive, currently indicating that leveraged traders are in a net long position and sometimes paying annualized returns of over 50% to the short side. We can also see a clear shift in the mid-October period, indicating a transition from oscillating around the midpoint to a sustained positive value.
While funding rates have cooled down this week, they remain positive overall.
Since mid-October, there has also been a reversal in the implied volatility of options, which started to surge during this week’s chaos. Since May 2021, this indicator has been declining, as investor interest weakened during the bear market. It is also worth noting that the options market infrastructure, liquidity, and depth have matured significantly in 2023 and are currently on par with the futures market in terms of open interest.
The implied volatility (IV) of options, as indicated by this indicator, seems to have reversed its downward trend in the short term, more than doubling since its low point of around 30% in October and reaching over 97% this week. With spot ETF products opening new doors for institutional and retail capital, Bitcoin’s volatility is likely to evolve.
Long-Term Holders and New Traders
It is common for long-term dormant Bitcoin holders to react during major market events. This includes periods of market breakthrough to new all-time highs, around cycle tops and bottoms, and during significant shifts in market structure (such as Mt. Gox, halving, and now the introduction of spot ETFs).
The extent of unrealized profits held by these long-term investors can be measured by the LTH-NUPL indicator. This week, the indicator reached 0.55, a meaningful positive number, indicating that the average unrealized profit for long-term holders is at 55%. This level also represents a significant resistance level that Bitcoin bulls encountered in previous cycles.
Currently, the supply from long-term holders is slightly below its historical highs, having decreased by around 75,000 BTC since November, as more dormant Bitcoins were used for profit-taking.
While 75,000 BTC is a significant number, it should be viewed in the context of long-term holders’ supply, which accounts for 76.3% of the circulating supply. With these expenditures, the corresponding metric, short-term holders’ supply, is just starting to rebound from historical lows.
However, statistically, these expenditures from old traders are significant and have led to the largest profit-taking event since the peak of realized profits in November 2021. In this cycle, the peak of realized profits occurred on January 4th, allowing these Bitcoins to lock in profits of over $1.3 billion daily due to changing hands at higher cost bases.
Profit-taking is normal during an uptrend in the market, and the real question is whether the new demand from ETFs, expectations for the halving in April, and influx of demand from static holders will be enough to absorb all this profit-taking.
Conclusion
The events that occurred last week were historic both literally and metaphorically. These new spot Bitcoin ETFs have set new records in terms of scale, marking the culmination of over a decade of efforts in the industry. This achievement signifies the culmination of the industry’s persistent efforts despite significant resistance in politics, regulation, and finance to achieve the long-awaited goal of Bitcoin spot ETFs.
It is somewhat poetic that on January 11th, exactly 15 years have passed since Hal Finney’s first tweet on Twitter, “Running bitcoin,” and the spot Bitcoin ETF has been trading for exactly 15 years since then. The first Bitcoin transaction between him and Satoshi Nakamoto occurred the next day, January 12th, 2009.
On-chain and derivative indicators suggest that a significant portion of Bitcoin investors indeed treat it as a sell-the-news event. The key question for the future is whether the influx of demand from ETFs, expectations for the halving in April, and the influx of demand from static holders will be enough to break through this resistance.
While the ETF listing may have been priced in by the market, how long it will last remains to be seen.
