Why Did Bitcoin Price Drop 7% After ETF Approval? 

The recent 6.8% drop in Bitcoin’s price between January 11 and January 12, immediately following the approval of a spot Bitcoin ETF, seems to have confirmed the “sell-the-news” phenomenon that we anticipated last week. After a 75% rally in the 90 days leading up to the ETF’s initial trading, the lack of subsequent excitement led to a price correction, bringing Bitcoin down to $43,180. This is classic “buy the rumor, sell the news” behavior that have characterized financial markets since their inception. 

This drop has led traders to question if a bearish sentiment is setting in, especially after Bitcoin’s repeated failure to break above the $47,000 mark in the past week. There are concerns that market makers and whales, who might have bought Bitcoin anticipating a price surge post-ETF launch, could now be selling at a loss. Additionally, with the Bitcoin halving event less than 100 days away, miners might feel compelled to sell part of their holdings. This is evidenced by a reported six-year high in miners’ outflows to exchanges, amounting to $1 billion worth of BTC, according to Bitcoin News.

However, not all indicators point to a bearish market. Historical data from CryptoQuant suggests that peaks in BTC transfers from miners have often coincided with price bottoms, as seen in June and November 2022, and March and August 2023. This pattern might give confidence to bulls, although the relationship between miners’ net flows and short-term BTC price movements remains speculative.

An analysis of Bitcoin derivatives provides further insights. The aggregate futures open interest has risen by 14% since January 5, indicating sustained interest in leveraged positions. Notably, CME leads with a 30% market share in BTC contracts. This data suggests that the recent sell-off was not driven by retail traders using excessive leverage, nor are these traders predominantly betting on a price decline.

The sentiment in the options market also doesn’t indicate a bearish trend. The put-to-call ratio for Bitcoin options volume, which has remained between 0.35 and 0.65 in the past week, shows a lower demand for put (sell) options. A more balanced ratio would be expected if investors feared a significant price crash.

Part of Bitcoin’s recent price dip may also be attributed to confusion about the workings of the spot ETF in terms of creation, redemption, and price formation. Differences between ETF issuers and a delay in inflow data could contribute to market uncertainty. Additionally, skepticism has been fueled by false ETF approval alerts and concerns raised by some brokers restricting clients from investing in the sector.