On January 2, Bitcoin hit $45,000, which was the highest level it had reached since April 2022.
The price of Bitcoin (BTC) experienced a sharp reversal on Wednesday, erasing most of the gains it had made since the start of 2024. This plunge happened just three days into the new year after BTC had reached its highest price in nearly two years a day earlier.
On Tuesday, Bitcoin hit $45,000, which was the highest level it had reached since April 2022. However, within a day, the price dropped by 9%, falling to $41,480 temporarily before closing for the day at $42,850. This sudden crash, after a recent rally, also impacted companies related to cryptocurrencies and some other major coins. For example, the share price of Coinbase initially declined by over 8% before making up some of those losses. Some cryptos like Ethereum, Litecoin, Solana, and XRP experienced declines of between 6% and 10% amidst the sell-off.
Uncertainty About Spot Bitcoin Approval Could Have Prompted the Sell-Offs
According to analysts, uncertainty around whether a Bitcoin exchange-traded fund (ETF) will be approved by the US Securities and Exchange Commission is largely to blame for the BTC price drop. A BTC ETF would allow mainstream stock investors to get exposure to the coin without having to directly purchase and hold the digital currency.
By the end of 2023, BTC had surged nearly 160% in value. This was tied to growing expectations amongst investors that the SEC was likely to finally approve a spot Bitcoin ETF in January 2024. Allowing this would represent a major shift in policy by US financial regulators towards cryptocurrencies.
However, not everyone expects regulatory approval for a Bitcoin ETF to happen this month. Some analysts think the SEC will reject all the ETF applications submitted so far since they believe none of them adequately meet the requirements. However, they warn rejection could cause backlash from companies against the SEC. This uncertainty likely motivated short-term speculators to exit their long positions.
Bitcoin Price Was Already Overbought and Needed to Cool Off
Some experts pointed out that speculative trading activity had pushed BTC’s price up too far and too fast, meaning a crash was imminent. Data from a crypto analytics platform Coinglass showed over $600 million worth of cryptocurrency futures contracts were liquidated across exchanges during the sell-off, the highest amount of liquidations since mid-December.
One industry expert, Darius Tabatabai, a co-founder at Vertex Protocol, explained that recent months of consistent gains had made Bitcoin look clearly overvalued, increasing risks in the event of a crash. While describing the sell-off as relatively healthy for the market, he did acknowledge the dangers posed by excessive speculative trading using leverage. He said:
“The warning lights were flashing when we saw spots higher and funding rates higher over the holiday period. Higher leveraged prices in thin markets are not generally a good recipe for stability, and the washout today seems relatively healthy.”
BTC price drop has certainly increased speculation about the possible outcome of the anticipated spot ETF approval. The possibility of a green light from the SEC has increased the coin’s price and raised it to an overbought level, necessitating a drop. Investors might also be withdrawing their positions as the decision date draws closer since no one is sure about the possible outcome. If the regulator refuses to approve, the price of Bitcoin may drop drastically. Investors may be trying to tread with caution by withdrawing their funds just days before the January 10 Grayscale deadline date.