Why Bitcoin, Dogecoin, and Etherium Fell Today

Several major cryptocurrencies slumped on Tuesday as investors grappled with the implications over capital inflows to the crypto market following the U.S. Securities and Exchange Commission’s (SEC’s) landmark approvals of the first spot Bitcoin (BTC -0.56%) exchange-traded funds (ETFs) almost two weeks ago on Jan. 10, 2024.

When all was said and done during today’s regular trading session, the price of Bitcoin had fallen 2.2%, Ethereum (ETH -5.18%) was down 6.4%, and Dogecoin (DOGE -3.21%) had declined 5.9%.

Excitement is waning for spot Bitcoin ETFs

The price of Bitcoin, in particular, has declined around 20% from its post-ETF approval highs of around $49,000 as the excitement surrounding the approvals has seemed to wane. That marked a three-year high on Jan. 11, the day after the SEC’s formal approval of 11 competing spot Bitcoin ETFs hit the wires.

To be fair, Bitcoin is also still up more than 70% over the past year. The bulk of that gain came in a multi-month rally that began in Oct. 2023 after the SEC declined to appeal a federal court’s ruling in August that prevented crypto-asset manager Grayscale Investments from converting its popular Grayscale Bitcoin Trust into an ETF.

Many investors considered this a huge deal for the cryptocurrency market in general. ETFs are a much more accessible medium for investors putting their capital to work in cryptocurrency assets, after all, compared to setting up separate crypto accounts or wallets with a crypto-specific broker. ETF shares can be bought and sold throughout the normal trading day through virtually any broker, similar to how retail investors can easily buy and sell publicly traded stocks.

Crypto-industry watchers also mused that once the first spot Bitcoin ETFs were finally approved, it would not only serve as validation for crypto assets as a mainstream investment medium but could also present an enormous windfall for ETF providers as capital surged into crypto assets. According to research from data analytics firm CryptoQuant, the capital influx stemming from spot Bitcoin ETFs has the potential to increase the overall cryptocurrency market capitalization by a total of more than $1 trillion over the long term.

This is more than a simple “sell the news” event

While some investors are undoubtedly taking their quick crypto profits off the table given the massive rally, I think this situation is more than a simple “sell the news” event.

According to a report from digital asset manager CoinShares this morning, for example, crypto funds saw inflows of “only” $1.25 billion in the first week after the launch of the first Bitcoin ETFs. That influx turned to an outflow of $21 million last week, however, as some large institutional investors took advantage of the rally to pare their own positions.

But even that surprising news requires more perspective. As Bloomberg Intelligence’s senior ETF analyst Eric Balchunas pointed out on X this week, the outflows have been primarily fueled by more than $2.2 billion in withdrawals from Grayscale’s spot bitcoin ETF alone. Among those large sellers was the estate of former cryptocurrency exchange FTX, which liquidated around $1 billion of its holdings as part of its bankruptcy proceedings.

That could signal a light at the end of this tunnel for crypto bulls, however. There’s certainly plenty of work to be done for the cryptocurrency market to gain true acceptance as a mainstream investment option. But it’s also not exactly common to see a bankrupt cryptocurrency exchange liquidating its massive positions on the heels of what otherwise should have represented a watershed moment for the crypto asset class.

Once the dust settles surrounding the recent spot Bitcoin ETF approvals, I won’t be the least bit surprised if the crypto market’s outflows turn back to inflows as more investors begin dipping their toes into the crypto pool. If that happens, this pause in Bitcoin’s rally might just prove to be short-lived.