Market Reaction To Bitcoin ETF Rumours Shows Latent Demand

Market Reaction To Bitcoin ETF Rumours Shows Latent Demand

An irresponsible social media post by a major crypto news outlet has led to some interesting insights about the state of the market.

On Monday 16 October, traders were stunned as the price of bitcoin soared by $2,000 in just six minutes, almost touching $30,000.

The reason for the unusual price action (even for bitcoin) was a post that the BlackRock ETF had been approved, made on Twitter/X by the usually reliable industry news site CoinTelegraph. When it turned out to be false, traders rushed to sell again. Within another 15 minutes, it had dropped back to where it started – a ‘full retrace’, in trading terms.

In the hours and days following the move, though, bitcoin showed surprising strength – recovering all of its losses and putting in a new yearly high of $35,000 by early the next week. One explanation is that the market was digesting a new piece of information that this episode provided.

Ten Years In The Making

An Exchange-Traded Fund or ETF is a type of investment fund that allows one or more assets (for example, all the individual stocks in an index like the S&P 500) to be traded as a single product on a stock exchange. In the case of bitcoin, it would allow regular retail investors and institutions to buy bitcoin within a secure, regulated wrapper, using an ordinary brokerage account rather than a crypto exchange.

The idea of a bitcoin ETF is nothing new. Ten years ago, the Winklevoss twins (who later founded Gemini) proposed the first BTC ETF. The US Securities and Exchange Commission (SEC) has approved bitcoin futures ETFs, which do not actually hold any bitcoin. However, the regulator has repeatedly denied applications for a ‘spot’ ETF – which would hold BTC, meaning demand would be passed through to the underlying bitcoin market – over concerns about market manipulation.

However, that might be about to change. Earlier this year, BlackRock, the largest asset manager in the world, filed an application for a spot Bitcoin ETF. The expectation is that this would open the floodgates to a huge amount of institutional and retail money that is interested in crypto, but that is only willing or permitted to deploy their capital within such a regulated framework.

Several other spot bitcoin ETF applications from other major institutions followed, and approval by the SEC is now considered only a matter of time – potentially by mid-January 2024, if not this year.

Fake News, Real Price Action

CoinTelegraph’s post on Twitter/X was entirely plausible, then, if a little earlier than expected. In reality, their ‘source’ was a photoshopped headline from a Bloomberg terminal, dropped by an unknown user in a Telegram chat. In their rush to be the first to break the story, CoinTelegraph’s editors did not verify the post, which was later deleted, along with the user’s account.

Crypto Twitter, and some reputable news outlets, jumped on the story. Traders, believing that a spot ETF was about to be launched, raced to buy bitcoin and front-run the wave of money they thought would be coming into the market.

Between the spike up to $30,000 and the crash back to $28,000, over $100 million in liquidations occurred. Based on one tweet, traders had gained and lost huge amounts of money.

However, traders did not lose confidence after this debacle. The market did not return to its previous state. Over the coming days, bitcoin worked its way higher once again.

Larry Fink Responds

One of the reasons for this may be the insight that CoinTelegraph’s post provided, as a kind of ‘dummy run’. Traders realised what could happen when the real approval occurred. BTC climbed $2,000 in 6 minutes, before reality set in. What would it mean if an ETF was the reality?

The episode served to remind the market that bitcoin is not dead. After a long bear market in 2022, and a recent few months of sliding prices, there’s still plenty of interest on the sidelines, waiting for the right moment.

Moreover, there’s the wider global backdrop. Larry Fink, CEO of BlackRock, described the market action on Fox Business as a ‘flight to quality’ at a time of war and uncertainty. He named crypto alongside gold and treasuries as safe haven assets. (Fink later clarified that he could only talk about ‘crypto’, not ‘bitcoin’ because BlackRock has a bitcoin product in the pipeline.)

You could argue that Fink has a good reason to recommend bitcoin, since BlackRock will benefit enormously from the trading fees on a new ETF. Nonetheless, the fact that such a well-known figure from the conventional financial world was comparing bitcoin with gold and treasuries on TV, and saying that BTC would have a role to play in maintaining investors’ wealth in the future, is a marked departure from previous sentiment.

The Market Cycle Develops

Finally, the timing of the fake announcement, and Fink’s commentary, line up with the evolving market cycle. A year after bitcoin bottomed out, the market is coming around to the idea that BTC is here to stay after all. Traders as a whole might be moving from the Disbelief stage to Hope.

On top of that, Bitcoin’s next Halving is only a few months away, probably sometime around April 2024. This is always an important event in Bitcoin’s calendar, as the rewards for miners are cut in half, reducing the amount of new BTC available to be sold – decreasing supply, while demand stays the same. This time, mining rewards will be cut from 6.25 BTC per block (every 10 minutes on average) to 3.125 BTC.

This Halving will see Bitcoin’s inflation rate drop to less than 1%, making it the hardest money in the world. At a time of global conflict and high inflation for conventional currencies, that’s a very attractive proposition.

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