Bitcoin price sells-off after ETF approval — Have investors turned bearish?

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Bitcoin price dropped by 6.8% between Jan. 11 and Jan. 12, confirming bears’ theory of a sell-the-news-style event occurring after the approval of a spot Bitcoin exchange-traded fund (ETF). The much-anticipated event ensued after a 75% rally in the 90 days leading to the initial trading on Jan. 11. This partially explains the lack of excitement and the subsequent price correction down to $43,180.

Traders are now questioning whether investors are becoming bearish after multiple failed attempts to break above $47,000 in the last week. On one hand, there is some rationale behind the fear, meaning market makers and whales that tried to front-run the spot ETF issuers by buying ahead of the launch might be forced to sell at a loss — if this hypothesis is valid. Furthermore, Bitcoin (BTC) miners might feel pressured to sell some of their holdings given that the halving is less than 100 days away.

Regardless of how profitable a Bitcoin mining operation is, a 50% cut in the block subsidy will significantly affect margins. According to Bitcoin News, miners’ outflow hit a six-year high as $1 billion worth of BTC was sent to exchanges.

NEW: #Bitcoin miners’ outflow hits a six-year high as more than $1B worth of #Bitcoin is sent to exchanges

— Bitcoin News (@BitcoinNewsCom) January 12, 2024

However, as CryptoQuant data shows, a handful of other peaks in BTC transfers from miners coincided with price bottoms in June 2022, November 2022, March 2023 and August 2023. This data could instill confidence in bulls but might also be a coincidence. There is no rationale for a relationship between Bitcoin miners’ net flows and the short-term BTC price, and the same chart also displays multiple instances of large transfers with no meaningful price impact.

To understand whether traders are effectively turning bearish, one should analyze Bitcoin derivatives. For starters, the aggregate futures open interest has increased by 14% to 446,500 BTC from 392,130 on Jan. 5, meaning investors’ interest in leverage positions has not faded, and neither has it been negatively impacted by liquidations. It is worth noting that CME is the absolute leader with 135,480 BTC contracts, a 30% market share.

Next, one should analyze whether retail traders using leverage influenced the price action. Perpetual contracts, also known as inverse swaps, include an embedded rate that is typically recalculated every eight hours. A positive funding rate indicates increased demand for leverage among long (buy) positions.

Bitcoin perpetual futures 8-hour funding rate. Source: Coinglass

Data shows that the BTC futures funding rate has stabilized at a mere 0.2% per week since Jan. 4, indicating balanced demand for leverage between longs and shorts (sell). In essence, the recent sell-off was not caused by retail traders using excessive leverage, nor are those investors betting on a price decline.

Traders can also gauge the market’s sentiment by measuring whether more activity is going through call (buy) options or put (sell) options. A 0.70 put-to-call ratio indicates that put option open interest lags the more bullish calls and is, therefore, bullish. In contrast, a 1.40 indicator favors put options, which can be deemed bearish.

Deribit BTC options volume put-to-call ratio. Source: Laevitas

The put-to-call ratio for Bitcoin options volume has stood between 0.35 and 0.65 in the past seven days, reflecting the lower demand for put (sell) options. If investors feared a potential BTC price crash, such a rate would have experienced a change toward a more balanced ratio.

Related: Ethereum price soars as Bitcoin drops — Did ETH steal BTC’s thunder?

Part of Bitcoin’s dip on Jan. 12 can be explained by the lack of information on how the spot ETF works in terms of creation, redemption and price formation. For instance, there are slight differences between issuers, so the inflow data can lag a couple of days. Furthermore, traders became extremely skeptical after multiple false ETF approval alerts and the FUD (fear, uncertainly and doubt) caused by some brokers not allowing clients to invest in the sector.

Additionally, no one knows how the spot Bitcoin ETFs will open after weekend pauses and the eventual volatility outside regular market hours. If one lacks information and does not fully understand the ETF impact, including how much new inflow entered the industry, odds are traders will panic sell to avoid negative surprises — boosting the FUD behind the recent price correction.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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