Bitcoin crash after approval of ETFs; What was the cause?

Bitcoin price Recently, after the approval of cash ETFs in the US, it has experienced a relatively sharp decline, which was expected by many analysts. But what are the factors behind the recent fall of Bitcoin and is it possible that this correction will continue in the coming days?

According to Cointelegraph, the price of Bitcoin fell by 6.8% between January 11 and 12 (December 21 and 22), and with this, the famous theory “Buy with rumors and sell with news» About the approval of Bitcoin Cash ETFs. This happened after a 90-day growth period, which was accompanied by a 75% increase in the value of Bitcoin; A trend that partly explains yesterday’s price correction to the $41,500 floor.

Also read: Everything about Bitcoin ETF in simple words

Now the question arises in the mind of the traders that after several attempts of Bitcoin to break the resistance of $47,000, the view of investors towards this digital currency has become negative or not? On the one hand, there are reasons behind investors’ fear, and this means that some market makers and whales who were waiting for an opportunity to buy Bitcoin after the supply of ETFs were finalized, may have been forced to sell at a loss. In addition, some miners may be under pressure to sell some of their holdings due to the approaching halving (less than 100 days away).

Regardless of how much profit a Bitcoin miner earns, halving the reward for mining each block after halving will reduce their income. On-chain data also shows that the output of miners has reached its peak in the last 6 years, and 1 billion dollars of bitcoins have recently been sent to exchanges.

As the data of CryptoQuant shows, it has been seen several times in the past that the price has reached its bottom with the peak of Bitcoin withdrawals from miners’ addresses. This statistic can make buyers more hopeful, and on the other hand, it can be completely coincidental. Basically, there is no convincing reason to confirm the correlation between the output of the miners’ address and the short-term fluctuations of Bitcoin, and it has been seen many times in this chart that the price has not shown a significant reaction after a significant volume of withdrawals from the miners’ addresses.

To get a deeper understanding of whether or not traders have become pessimistic about Bitcoin, one should take a look at the derivatives market. To begin with, it should be said that the volume of open trading positions (Open Interest) in the futures market has increased from 392,130 bitcoins on January 5 (15th) with a growth of 14% to 446,500 units, which means that investors are interested in using leveraged transactions in This section has not been reduced, and at the same time, it has not been negatively affected by the large volume of liquidated positions during the past days. It’s also good to keep in mind that the Chicago Mercantile Exchange (CME) is the Bitcoin futures market leader with a 30% share of open positions at 135,480 BTC.

In the next step, we should also examine whether the amount of trading leverage among retail traders has been affected by recent price fluctuations or not. Perpetual futures contracts have a fixed fee, which is usually updated every 8 hours. The purpose of the exchanges to charge this fee, which is called the funding rate, is to prevent the market from becoming unbalanced. A positive funding rate also indicates an increase in demand for leverage among long traders or buyers.

As can be seen from the statistics, the funding rate of Bitcoin futures has stabilized at 0.2% per week since January 4th (14th), which shows the balance between the demand for leverage among short and long traders. As a result, it can be said that the recent decline was not due to excessive use of trading leverage among retail traders, nor was it due to investors betting on a price drop.

The next way to measure the sentiment of the market is to see that most of the activity in the Bitcoin options market is of the type of call or put contract. In general, the ratio of 0.70 put-to-call contracts means that the volume of open put option contracts is lower than open call option contracts, and it is evaluated as a bullish sign. On the other hand, the ratio of 1.40 between the two means that the volume of put option contracts is more and is considered a bearish sign.

The ratio for Bitcoin has remained between 0.35 and 0.65 over the past 7 days, indicating less demand for put options. If investors were afraid of a possible drop in the price of Bitcoin, the rate should have experienced a move to more balanced levels (closer to one).

Part of the fall of Bitcoin on January 12 (22nd) was because a part of the market did not have enough information about how cash ETFs work, redemption and price formation in these products. For example, there are slight differences between the issuers of these ETFs, and therefore the data on the flow of capital into these funds can be released a few days later. In addition, traders were largely skeptical of the news at the time of the official confirmation after several false reports about the approval of Bitcoin ETFs, which eventually led some brokerages to not allow their clients to invest in these products.

Add to that that right now, no one knows how Bitcoin ETFs are going to reopen after the week-end trading halt and after-hours price volatility. If traders do not have enough information and do not understand the impact of ETFs, including the amount of new capital entering the Bitcoin market through these products, it is natural for them to sell to avoid negative surprises; An issue that will strengthen the fear of Bitcoin correction in recent days.