This Investing Phenomenon Could Be Why Bitcoin Prices Are Down After ETF Approval (2024)

Bitcoin began the year primed for growth. Big things were on the horizon in 2024 — including the long-awaited approval of bitcoin spot ETFs. But the cryptocurrency community notched that victory in early January, and bitcoin isn’t hurtling into the stratosphere. In fact, it has lost $7,000 in value since the news broke.

The decline of bitcoin prices despite this recent development might come as a surprise to some, but it’s actually a great example of a broader financial phenomenon in which investments perform poorly in the face of good news.

Here’s why that happens — and what you should know about buying bitcoin right now.

Bitcoin drops in days following spot ETF approvals

On Jan. 10, the U.S. Securities and Exchange Commission gave the crypto market exactly what it wanted: approval for a spot bitcoin ETF. These exchange-traded funds allow investors to get exposure to bitcoin’s steep rises (and its troughs) without having to actually own the asset, so crypto optimists expected them to bring in lots of new capital (BTW: Financial advisors generally suggest investors devote no more than 5% of their portfolio to risky assets like crypto).

The news was massive, given that bitcoin fans have been asking for these ETFs for years. The fervor reached a peak recently, with Grayscale taking the SEC to court over its denial of the company’s ETF and finance giants like BlackRock and Fidelity applying for their own. In total, 11 companies saw their applications approved. Crypto enthusiasts predicted a 2021-esque bull run.

Indeed, in the days after the SEC's approval, over $2 billion flowed into bitcoin ETFs. But bitcoin prices themselves sunk. Immediately afterward, the crypto shot up by about $3,000 to a price of $48,600; since then, it has dropped down to $41,000 — its lowest price since early December.

How 'selling the news' turns good news into losses

Cryptocurrency prices are far more volatile than stocks, but their general movement tends to align closely with the stock market. It makes sense, then, that the crypto market suffers from many of the same peculiarities as stocks. One such quirk is that if a stock performs strongly during earnings season, smashing expectations, there’s a chance that shares will still depreciate.

This counterintuitive phenomenon is caused by “selling the news,” or the act of profit-taking by shareholders after good news breaks. Active investors might opt to take the short-term profits of good news instead of holding on for future gains. It’s not an act that’s inherently harmful when done by an individual, but a large group of traders selling their shares at once can easily influence prices.

And when a group of sellers is larger than the group of potential investors, the flood of shares back into the market can cause a shift in supply and demand that drives share prices lower as a result.

This helps to explain how bitcoin suffered at the hands of its own success. Bitcoin spot ETFs have been sought out for over 10 years (and for the last two years especially). As it became increasingly more probable that these ETFs would see approval in January, it’s likely that active traders loaded up on bitcoin ahead of time with the expectation that they could take profits on the post-approval boom.

We can see this reflected in not just the price of bitcoin declining but also the billions of dollars in outflows from exchanges and crypto funds. Grayscale reportedly saw over $2 billion in liquidations from its bitcoin-trust-turned-bitcoin-ETF after the SEC approved it.

All said, does the decline in bitcoin’s signal that the ETF news isn’t actually as good as once believed? Not really.

Experts still anticipate spot funds for bitcoin will unlock the market for a ton of new investors and send prices back toward all-time highs. They see these losses as just a small setback in the bullish bigger picture; if anything, potential bitcoin investors may take the opportunity to buy bitcoin while it's quote-unquote "discounted."

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