Bitcoin bulls are facing a headwind as the Federal Reserve's waning dovish tones coincide with rising inflation fears and profit-taking by investors after the launch of Bitcoin ETFs contributed to a 15 percent price drop in two weeks.
On Tuesday, Bitcoin fell to $38,500 (a 21.5 percent drop) from its January 11 high of $49,100, as the spot Bitcoin exchange-traded funds (ETFs) in the U.S. were launched. Since then, bulls have pushed the price back to $40,000, where it faces resistance. As of writing, Bitcoin sits at $40,080, up slightly by 0.43 percent from the previous day.
The Fed signaled potential three rate cuts this year back in December — which boosted both crypto and traditional markets. However, recent inflation concerns due to disruptions to the Red Sea/Suez Canal shipping have increased the possibility of the Fed delaying its first rate cut beyond March.
Spot Bitcoin ETF woes
Apart from the potential of this delay, multiple other factors may push the price lower. The most notable is sales by Grayscale, an investment fund that's been offloading large amounts of Bitcoin (BTC) since the launch of Bitcoin ETFs. This selling pressure coincides with profit-taking by traders and a shift towards lower-fee ETFs, putting downward pressure on Bitcoin's price.
Grayscale's 1.5 percent fee on its GBTC ETF compared to the lower 0.2 to 0.3 percent fees offered by newer entrants has triggered many holders to request redemption. This has forced Grayscale to sell significant amounts of BTC to meet redemption requests and return funds to clients. While some reinvest in other spot BTC ETFs, others choose to hold onto cash.
As of Tuesday's closing, Bloomberg Intelligence ETF analyst James Seyffart reported that GBTC had experienced a cumulative outflow of $3.96 billion since its conversion into an ETF.
The bankrupt cryptocurrency exchange FTX is one of the significant contributors to GTBC sales, with the FTX estate offloading 22 million shares valued at nearly $1 billion in recent days. This move has resulted in FTX reducing its GBTC ownership to zero. The exchange made the sales to distribute payouts to creditors as part of the concluding bankruptcy proceedings.
Despite anticipations for a slowdown in selling and a potential stabilization of Bitcoin's price following the FTX sales, a new concern arose with the looming possibility of the release of Mt. Gox’s Bitcoins.
Tokyo-based Mt. Gox was once a crypto giant before it closed down and filed for bankruptcy in 2014 following a hack of its 850,000 Bitcoins. If this amount of Bitcoins was released, it could trigger a sell-off as recipients cash in on the immense price surge since the 2014 hack, when Bitcoin was priced at $450. Analysts warn this flood of coins could tank Bitcoin's price to the low $30,000s.
Despite recent price pressures on Bitcoin, European asset manager CoinShares' annual report paints a bullish picture for crypto. The report cites potential Fed rate cuts and a growing comfort among investors with digital assets as key drivers of optimism.
"With the U.S. Federal Reserve likely to cut interest rates in the first half of 2024, Bitcoin, alongside gold, could see increased appeal," the report read.
Historically, Bitcoin and the dollar have moved in opposite directions, so Bitcoin's recent price decline aligns with a stronger U.S. dollar. However, according to BeinCrypto, the weakening appeal of the U.S. dollar amid geopolitical shifts and supply chain changes further strengthens Bitcoin’s position. Concerns over U.S. debt sustainability hint at diminishing confidence in the dollar, which is beneficial for Bitcoin.