Bitcoin’s recent surge encountered a significant setback on Wednesday, wiping out most of the gains it had accumulated in the first days of the new year. This abrupt downturn marked a departure from its long-standing upward trajectory, which had outperformed the broader slump in traditional assets worldwide. The world’s largest cryptocurrency experienced a dip of up to 9.2%, briefly falling below $41,000 just after 7 a.m. in New York. This came a day after Bitcoin reached a 21-month high by surpassing the $45,000 mark. The day’s price swings were the most substantial in over two months, causing ripples of volatility in crypto-linked stocks, with shares in the US crypto exchange Coinbase Global Inc. dropping as much as 8.1% before a partial recovery.
The heightened volatility is attributed to speculation surrounding the approval of a spot Bitcoin ETF by the US Securities and Exchange Commission (SEC). Bartosz Lipiński, CEO of the crypto trading platform Cube.Exchange, stated, “Volatility is increasing over the prospect of whether or not the SEC will approve a spot Bitcoin ETF. Markets were a bit overbought.”
Wednesday’s market turbulence led to the liquidation of over $600 million in positions across all cryptocurrencies on major exchanges, marking the highest liquidation volume since December 11, according to data from Coinglass.
Bitcoin had been on an impressive rally in anticipation of a crucial decision by the SEC on January 10, which could potentially approve the first exchange-traded fund directly tied to Bitcoin’s spot price. The cryptocurrency’s value surged nearly 160% in 2023, aligning with the broader uptrend in digital asset fortunes.
However, Matrixport analyst Markus Thielen expressed skepticism in a note on Wednesday, predicting that the SEC may reject all Bitcoin ETF proposals this month. Thielen believes recent applications may fall short of the necessary requirements for SEC approval. In the event of rejection, some market watchers anticipate potential retaliation from issuers against the regulator.
Despite this uncertainty, some ETF issuers have named authorized participants for their Bitcoin-linked products in recent days, signaling a potential step towards approval. Notable names among them include Wall Street heavyweights Jane Street Capital and JPMorgan, responsible for managing cash flows in and out of ETFs.
The impact of Bitcoin’s reversal was felt across other cryptocurrencies as well. Ether saw a decline of up to 11% on Wednesday, while Solana’s SOL experienced a sharp drop of more than 28%, both later recovering from their initial declines.
As the market navigates these uncertainties, Fadi Aboualfa, head of research at crypto custodian Copper Technologies Ltd., predicts heightened volatility in the short term, emphasizing the need for careful risk assessment across all asset classes as the year unfolds.
