Bitcoin, the world’s largest cryptocurrency, has dropped to its lowest level in seven weeks, trading below $40,000 for the first time since the launch of 11 spot bitcoin exchange-traded funds (ETFs) on Jan. 11. The spot ETFs, which allow investors to buy and sell bitcoin directly through a regulated platform, were expected to boost the adoption and demand for the digital asset. However, some analysts and traders have warned that the ETFs could also increase the volatility and liquidity risks of bitcoin.
Bitcoin had rallied to a record high of over $69,000 in November 2023, amid growing anticipation that the U.S. Securities and Exchange Commission (SEC) would approve the first spot bitcoin ETFs. The SEC had previously rejected several applications for bitcoin ETFs, citing concerns over market manipulation, fraud, and investor protection. However, on Jan. 10, 2024, the SEC announced that it had approved 11 spot bitcoin ETFs, including those from Grayscale Investments, BlackRock, Fidelity, and VanEck. The ETFs began trading on Jan. 11, attracting billions of dollars in inflows and trading volumes.
Since then, however, bitcoin has fallen almost 20%, losing about $14,000 of its value. On Jan. 23, 2024, bitcoin dipped below $40,000, a key psychological and technical support level, before recovering slightly. At the time of writing, bitcoin was trading at around $41,000, down 4% on the day.
What’s Behind the Bitcoin Slump?
There are several factors that could explain the recent decline in bitcoin’s price. Some of them are:
- Profit-taking: Some investors may have taken profits after the ETFs launch, as they had bought bitcoin in anticipation of the approval. According to CoinDesk, FTX, a crypto exchange that entered bankruptcy in 2022, has sold 22 million shares worth close to $1 billion in the Grayscale Bitcoin ETF, one of the largest and most popular ETFs. This could have put downward pressure on the bitcoin price.
- Competition from traditional stocks: Bitcoin may have lost some of its appeal as an alternative asset class, as the U.S. stock market has been hitting new record highs, driven by strong earnings, economic recovery, and stimulus measures. The S&P 500 index, for instance, has gained over 6% since the start of 2024, outperforming bitcoin. Some investors may have shifted their funds from bitcoin to stocks, seeking higher returns and lower risks.
- Regulatory uncertainty: Despite the approval of the spot ETFs, the regulatory environment for bitcoin and other cryptocurrencies remains unclear and challenging. The SEC, for example, has recently issued a warning to investors about the potential risks and pitfalls of investing in crypto ETFs, such as price volatility, liquidity issues, cybersecurity breaches, and operational failures. The SEC has also launched investigations into several crypto platforms and projects, such as Coinbase, Uniswap, and Ripple, over alleged violations of securities laws. Moreover, the U.S. Congress is considering several bills that could impose stricter rules and taxes on the crypto industry.
What’s Next for Bitcoin?
The outlook for bitcoin is mixed, as there are both bullish and bearish factors that could influence its price in the near future. Some of them are:
- More ETFs: The SEC is still reviewing several applications for other types of bitcoin ETFs, such as futures-based and leveraged ETFs. If approved, these ETFs could attract more investors and increase the liquidity and legitimacy of bitcoin. However, they could also amplify the volatility and complexity of the market, as they involve derivatives and leverage.
- Institutional adoption: Bitcoin could benefit from the growing interest and adoption of cryptocurrencies by institutional investors, such as hedge funds, banks, corporations, and governments. For example, MicroStrategy, a software company, has recently announced that it has bought another $400 million worth of bitcoin, bringing its total holdings to over 124,000 bitcoins, worth over $5 billion. Moreover, El Salvador, a Central American country, has made bitcoin a legal tender, allowing its citizens to use it as a medium of exchange and store of value.
- Innovation and development: Bitcoin could also gain from the continuous innovation and development of the crypto ecosystem, such as the launch of new products, services, and platforms that enhance the functionality, usability, and security of bitcoin. For example, the Lightning Network, a layer-2 solution that enables fast and cheap transactions on top of the bitcoin blockchain, has been growing rapidly, reaching over 3,000 nodes and 75,000 channels. Moreover, the Taproot upgrade, a major improvement to the bitcoin protocol that enhances its privacy, scalability, and smart contract capabilities, is expected to be activated in November 2024.
