The debut of the Bitcoin Exchange-Traded Fund (ETF) was a historic event in the world of investing, signifying the acceptance of digital assets into the traditional financial system. However, since the launch of the Bitcoin ETF, Bitcoin’s (BTC) price hasn't reacted as many believed and instead experienced a ‘surprising’ downturn of over -14.00% since the ETF approvals. 

So what factors contributed to the BTC price decline, and is this another opportunity to buy?

Why did BTC sell off?

While it's hard to know the exact reasons behind any price movement there are certain market phenomena and fundamental factors that can help explain the current Bitcoin (BTC) price sell-off post the listing of the BTC ETFs.

1. Grayscale’s Large GBTC Sales and Arbitrage Profit Taking:

Arguably the main reason for the fall in BTC’s price has been due to the large number of Grayscale Bitcoin Trust (GBTC) redemptions taking place post its translation from a trust to a BTC ETF.

Who is Grayscale?

Grayscale is one of the largest digital asset managers in the world and subsequently, one of the largest Bitcoin holders through its Bitcoin Trust investment product - holding over $23bn of Bitcoin. Since the approval for the Grayscale Bitcoin Trust (GBTC) to convert into a Bitcoin ETF, Grayscale has seen over -$3.40bn in outflows (sales) from its ETF.

Why are investors selling out of GBTC?

1. Investors are leaving to cheaper BTC ETF alternatives

The Grayscale BTC ETF currently charges a 1.50% per year management fee which is over 3x more than its BTC ETF alternatives, which charge around the 0.40% range. This higher fee is causing price-sensitive investors to sell their GBTC and move their funds to cheaper BTC ETF alternatives.

2. Tracking Profit on the GBTC discount trade

Over the last 3 years the Grayscale GBTC shares have traded at a large discount (between -10.00% to -50.00%) to the value of the Bitcoin it held. Due to this many investors bought GBTC shares at a -50.00% discount and simply waited till the Grayscale trust was converted into an ETF and the discount closed to 0.00% to sell their position - both of which have happened. 

The outflows and subsequent sales of Bitcoin from Grayscale are largely what is causing this short-term downward pressure on the BTC price (down over -18.00% since the ETF approvals).   This pressure is believed to be short-lived as most sellers will simply switch to a cheaper alternative BTC ETF causing buying pressure to come back.

2. 'Buy the Rumor, Sell the Fact' - A Classic Market Response:

Financial markets are forward-looking machines where participants are constantly trying to predict the future outcomes of events. 

This is where 'buy the rumour, sell the fact' comes to be. 

If market participants believe a future event is going to be positive for an asset's price, they will buy that asset weeks or even months before the event takes place. If enough buying happens this will force the price of the asset up (buy the rumour). Once the event takes place, many market participants subsequently sell their positions and lock in the profits made (sell the fact).

In the case of the Bitcoin ETF, market participants were trying to ascertain whether the Bitcoin ETF would be approved.

Buy the rumour: As rumours started to circulate about the imminent approval of the BTC ETF (16th October 2023), multiple market participants started to buy Bitcoin (BTC) over the coming months, and as a result, BTC’s price soared over +71.00% prior to the actual approval.

‍Sell the fact: Once the announcement had taken place and the BTC ETF was approved on the 10th of January 2024, those same market participants began to sell their BTC and lock in profits made - this selling caused a downward pressure on the BTC price which fell over -14.00%.  

The ETF Effect: A Bullish Catalyst For Bitcoin’s Long-Term Price

Historically, the introduction of an ETF has led to the increased accessibility and legitimacy of the asset class as an investment, subsequently opening it up to the largest pool of investment capital available and driving up its price in the long term. 

We can look to the emergence of the Gold ETF as a blueprint for Bitcoin. Since the launch of the Gold ETF in November 2004, gold exhibited a 7-year bull run, returning more than +323.00%.

Drawing parallels with the Gold ETF, the introduction of a Bitcoin ETF marks a significant milestone where a similar pattern in price is expected. The BTC ETF increases mainstream adoption and allows the largest pool of investment capital in the world to access exposure to it in a regulated way. These factors lead many to believe that, like the gold ETF, this will be the start of a new era in cryptocurrencies and bring with it the potential for an extended period of long-term price appreciation.