Volatility Increases Following SEC’s Spot Bitcoin ETF Approval

Bitcoin (BTC) concluded the previous week at approximately $41,750, marking a 5.0% decrease from the first week of the new year with a closing value of around $43,750. The price exhibited significant volatility, primarily influenced by the approval of BTC Spot ETFs, which heightened market dynamics. The week commenced with a robust uptrend on Monday in anticipation of the approval, witnessing a 9.0% price increase and nearly reaching $47,000. Tuesday saw BTC nearing $48,000 before encountering pronounced volatility due to false news regarding the approval, causing a dip below $45,000 before stabilizing around $46,000 overnight.

On Wednesday, the SEC granted approval for BTC Spot ETFs, intensifying volatility, particularly on Thursday when ETF trading commenced. BTC surged to almost $49,000 before initiating a substantial downtrend, notably on Friday, with a 7.7% price decline, breaking below $43,000. Throughout the weekend, the price experienced a gradual decrease, ultimately closing the week at approximately $41,750.

The launch of BTC Spot ETFs generated heightened market activity. Analysing the daily volume on centralized exchanges over a 7-day period, from the 8th to the 14th of January, daily volume nearly reached $50 billion, marking the highest figure recorded since November 2022. The ETF launch spurred increased activity across the entire market and not limited to BTC.

Between the 8th and the 14th of January, BTC recorded a daily volume of $17.8 billion, reflecting a 26% increase from the $14.1 billion recorded in the preceding week. Ethereum (ETH) exhibited a total daily volume of $7.7 billion during the same period, signifying an 83% increase from the $4.2 billion recorded in the prior week, showcasing an increased activity for the whole market.

The market’s recent strength, relative to BTC, is further substantiated by analysing BTC dominance, representing its market capitalization in relation to the entire digital asset market. BTC’s share stood at 51.1% at the week’s end, indicating a 5.4% decrease from the 54.0% registered in the previous week.

The price action of BTC, coupled with volume data and the performance of certain altcoins, demonstrates the adherence to the typical “buy the rumour, sell the news” pattern associated with major market events. Market participants, anticipating the ETF approval with a 90% probability, adjusted their portfolios accordingly before the SEC approval.

During Q4 2023, BTC exhibited significant strength, with a price increase of 57%, reaching about $42,300 from $27,000 at the end of Q3. Post-approval, when BTC almost reached $49,000, investors seized profits on positions initiated at lower BTC price levels and began reallocating capital to altcoins, as evidenced by the decline in dominance over the past week.

This pattern is a common occurrence and does not signify a failure in the ETF launch. In the initial two days of trading, the 11 BTC Spot ETFs concluded with a cumulative inflow of approximately $1.4 billion, partially offset by a $600 million outflow from Grayscale Bitcoin ETF (GBTC). The net inflow totalled around $800 million.

The GBTC outflow was facilitated as it was not a new product launch but a conversion from the existing Bitcoin Trust, holding over 600,000 BTC. Due to the higher management fee set by Grayscale (1.5%) compared to most competitors (0.2%/0.3%), some investors opted to withdraw their investment from Grayscale, likely reinvesting in other BTC ETFs with more favourable management fees.