The expected approval of a spot Bitcoin exchange-traded fund (ETF) in January might not immediately lead to a price surge for the cryptocurrency, according to a note by blockchain data firm CryptoQuant.
“The approval of the Bitcoin ETF could trigger a ‘sell the news’ event, causing the number one cryptocurrency’s price to drop, potentially to as low as $32,000,” CryptoQuant stated.
This phenomenon, known as “sell the news,” occurs when prices initially move higher ahead of a bullish event, only to see a decline shortly after. Experienced traders take advantage of this situation, leading to the closure or liquidation of a large number of leveraged positions.
While the potential approval of an ETF is generally seen as a bullish event as it opens the doors for more institutional inflows into Bitcoin, CryptoQuant’s data and analysis suggest caution.
Unrealized Profit Margins and Price Corrections
CryptoQuant notes the current high unrealized profit margins of around 30% for short-term Bitcoin holders. This historically precedes price corrections, as observed in previous instances.
“Moreover, short-term holders are still spending Bitcoin at a profit, while rallies usually come after short-term losses are realized,” the note explained.
Therefore, the potential approval of the Bitcoin ETF does not guarantee an immediate surge in price. Instead, it might trigger a downward correction in the short term as traders take profits and adjust their positions.
Institutional Inflows and the Long-Term Outlook
Despite the short-term caution, the approval of a Bitcoin ETF holds significant long-term implications for the cryptocurrency market.
“A spot ETF means that as much as $30 trillion in ‘advised wealth’ can potentially be invested in Bitcoin,” stated Michael Sonnenshein, CEO of Grayscale.
This influx of institutional investment has the potential to further boost the adoption and recognition of Bitcoin as a legitimate asset class.
However, it is crucial to consider the timing of such institutional inflows. If Bitcoin experiences a significant price correction in the short term, it could deter some institutions from entering the market immediately. They may opt to wait for a more favorable entry point.
As of the time of writing, Bitcoin traded at $42,823, indicating a 2% decrease over the past week. If the ETF approval is indeed granted by January 10, a price drop of over 25% to around $32,000 would be necessary to reach a level not seen since October.
In summary, the approval of a Bitcoin ETF could have a mixed impact on the cryptocurrency’s price. While it may not result in an immediate surge, it opens the doors for increased institutional investment in the long term. Traders should remain cautious of potential short-term price corrections following the approval.
