In other words, the overbought market collapsed in January after months of growing confidence about the SEC’s approval of Bitcoin ETFs, allowing for some price correction.
During this time, short-term traders helped drive up the price and booked profits by “selling the news” after the Bitcoin ETF was approved.
Finally, a tougher macro environment with the dollar strengthening after months of weakness increased bearish sentiment on Bitcoin’s overall outlook in January.
Here are the details:
Bitcoin ETF overbought market news
The crypto industry rejoiced after the DC Circuit Court of Appeals ruled in favor of Grayscale last August. The crypto hedge fund lawsuit alleges that the SEC’s decision to reject the Bitcoin ETF proposal was arbitrary and capricious.
The judge ordered the SEC to make a good faith effort to approve the ETF. Then, the price of Bitcoin began to rise in earnest in October.
New headlines continued to push Bitcoin higher each week, including updates on progress between more than a dozen ETF applicants and the SEC. The average exchange rate on crypto exchanges rose 80% in just over four months, from $25,811 on September 1st to $46,670 on January 10th. The average annualized ROI will be well over 200%. As JPMorgan expected, prices had to fall.
Profit taking by short-term Bitcoin price traders
Some Bitcoin investors adopt a long-term strategy of accumulating and holding rather than selling. They strongly believe that there is significant upside left in the global adoption curve of cryptocurrencies and are reluctant to sell their holdings. However, price arbitrage day traders tended to book profits in January.
Antoni Trenchev, co-founder of crypto finance company Nexo, said the Bitcoin price drop in January was an example of the “buy the rumor, sell the news” phenomenon in liquid exchange markets. “Some short-term traders appear to have inflated the price of the digital currency in anticipation of the recent ETF approval, then quickly took profits as the euphoria faded,” the Motley Fool report said.
Tough macro environment, bearish sentiment
“Over the past two weeks, Bitcoin has faced a more challenging macro environment, as evidenced by rising interest rates and a stronger dollar,” said Sean Farrell, head of digital asset strategy at Fundstrat Global Advisors LLC. mentioned in a recent memo.
Analysts at crypto exchange Bitfinex wrote in a note on Tuesday that Bitcoin prices fell in January because “bearish sentiment appears to be prevailing.” They expect key support levels to be at $38,000 and $36,000 if the correction continues, but Friday’s 5% rise could mean a recovery is underway.