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Bitcoin started the year prepared for growth. Big things were on the horizon in 2024, including the long-awaited approval of bitcoin spot ETFs. But the cryptocurrency community achieved that victory in early January, and bitcoin is not hurtling into the stratosphere. In fact, it has lost $7,000 in value since the news broke.
The decline ofbitcoin pricesAlthough this recent development may surprise some, it is actually a great example of a broader financial phenomenon in which investments underperform in the face of good news.
Here's why this happens and what you should know about it buying bitcoins right now.
Bitcoin Falls in Days After Spot ETF Approval
On January 10, the US Securities and Exchange Commission gave the cryptocurrency market exactly what it wanted: approval of a spot bitcoin ETF. These exchange traded funds allow investors to expose themselves to the sharp rises (and falls) of bitcoin without having to actually own the asset, so crypto-optimists expected them to bring in a lot of new capital (by the way: financial advisors generally suggest that investors not spend more of 5% of your portfolio to risky assets such as cryptocurrencies).
The news was massive, given that bitcoin fans have been asking for these ETFs for years. The fervor peaked recently, when Grayscale took the SEC to court for denying the company's ETF and financial giants like BlackRock and Fidelity filed for their own. In total, 11 companies had their applications approved. Cryptocurrency enthusiasts predicted a bull run similar to that of 2021.
In fact, in the days following SEC approval, More than $2 billion flowed into bitcoin ETFs. Butbitcoin pricesThey themselves sank. Immediately after, the cryptocurrency skyrocketed around $3,000 to a price of $48,600; It has since fallen to $41,000, its lowest price since early December.
How "selling the news" turns good news into losses
Cryptocurrency prices are much more volatile than stocks, but their overall movement tends to align closely with the stock market. It makes sense, then, that the cryptocurrency market suffers from many of the same quirks as stocks. One such quirk is that if a stock performs well during earnings season, beating expectations, there is a chance the stock could still depreciate.
This counterintuitive phenomenon is caused by โselling the news,โ or the act of profit-making by shareholders after good news is published. Active investors might choose to take advantage of short-term gains from good news rather than holding on to future gains. It is not an inherently harmful act when done by an individual, but a large group of traders selling their stocks at once can easily influence prices.
And when a group of sellers is larger than the group of potential investors, the flood of stocks returning to the market can cause a shift in supply and demand that, as a result, drives down stock prices.
This helps explain how Bitcoin suffered at the hands of its own success. Bitcoin spot ETFs have been sought after for over 10 years (and especially for the last two years). As it became increasingly likely that these ETFs would be approved in January, active traders likely loaded up on bitcoin early in the expectation of being able to profit in the post-approval boom.
We can see this reflected not only in the falling price of bitcoin but also in the billions of dollars in outflows from crypto exchanges and funds. Grayscale was reported to have seen more than 2 billion dollars in settlements of its bitcoin-trust-converted-bitcoin-ETF after the SEC approved it.
With all that said, does bitcoin's decline indicate that the ETF news is not as good as previously thought? Not precisely.
Experts still anticipate that spot funds for bitcoin will unlock the market for a host of new investors and drive prices back to all-time highs. They see these losses as just a small setback in the broader bullish picture; If anything, potential bitcoin investors can take advantage of the opportunity to buy bitcoins while they are quote-unquote "discounted."
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