Blame the Weak Hands and Not the Increasing Financialization of Bitcoin for the Ongoing Rout

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

With Bitcoin firmly perched on a seemingly endless downward spiral, some in the wider crypto community have been quick to blame the increasing financialization of Bitcoin for this ongoing rout, courtesy of the just-launched spot Bitcoin ETFs in the US. In fact, Bitcoin seems to have entered a new bear market in less than two weeks after hitting a fresh multi-year high. However, in direct opposition to the prevailing sentiment, profit-taking is the prime instigator of this latest bout of weakness.

Many in the crypto community have latched on to the veritable flood of redemptions emanating from Grayscale Bitcoin Trust (GBTC) spot ETF, now that its unit holders are no longer bogged down by the trust’s outflow barriers, to explain the cryptocurrency’s weakness. This, however, constitutes an oversimplification. Yes, GBTC’s cumulative outflows are massive at around $3.4 billion. And yes, some investors have been rotating out of the comparatively expensive Bitcoin futures (BITO) and other ex-US ETPs and into the American spot Bitcoin ETFs. However, when you net these competing flows against each other, you still get an overall inflow of around $721 million since the 11th of January, when these ETFs first started trading.

Clearly, spot Bitcoin ETFs are not the problem here. So, what is the root cause of this weakness? We believe it is a toxic combination of speculation and profit-taking. It is a fact that Bitcoin’s ongoing weakness was blamed on GBTC’s outflows, at least initially. We believe that some “weak hand” investors latched on to this thesis to liquidate their positions, exacerbating the initial downward move and creating a vicious cycle in the process, where every downward leg unleashes fresh supply. Of course, FTX’s sale of 22 million GBTC units to create additional liquidity for its bankruptcy proceedings have not helped matters. For context, just look at the quantum of profit-taking highlighted in the chart embedded in the above X post.

There is, however, hope that the current bout of selling will end soon. As we noted yesterday, BitMEX’s co-founder, Arthur Hayes, has postulated that Bitcoin’s ongoing correction will persist until the US Treasury’s quarterly funding announcement, currently scheduled for the 31st of January. In another encouraging sign, Bitcoin is now nearing its short-term cost basis, currently pegged at around the $38,100 price level. This level can act as a critical support level to break down the ongoing vicious cycle.

Also, do note that the other 9 spot Bitcoin ETFs now have assets that are equal to around 20 percent of GBTC’s. As the weight of ex-GBTC assets continues to increase, their inflows should start exerting greater influence on the market’s collective psyche.

Finally, even after undergoing a vicious rout, Bitcoin is still up 75 percent over the past 12 months, leaving virtually every other asset class in the proverbial dust.

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