Understanding the Market | Why did Bitcoin experience a significant drop after the launch of spot ETFs?

After the spot ETF was listed, Bitcoin unexpectedly entered a bear market, and the significant selling pressure behind it came from the previous continuous collapse in the cryptocurrency circle.

Grayscale's GBTC, which transitioned from a closed-end trust to an open-end spot ETF, significantly increased the supply of Bitcoin in the market, providing an opportunity for FTX, which is in bankruptcy liquidation, to sell off. On the other hand, the bankrupt cryptocurrency exchange Mt.Gox recently started repaying Bitcoin and Bitcoin Cash (BCH), further increasing the supply pressure.

Overnight, the price of Bitcoin plummeted from $49,000 per coin on January 11th, falling below $39,000, with a cumulative decline of 20%.

Data from Coinglass shows that since the approval of the Bitcoin spot ETF, a large number of long positions in Bitcoin have been liquidated.

Some media believe that Bitcoin entering a technical bear market is not only driven by "selling facts" and profit-taking, but also due to two important reasons.

The first reason is that Grayscale's Bitcoin spot ETF, GBTC, is the main factor causing capital outflow. Wallstreetcn previously mentioned that since the transformation of Grayscale Bitcoin Trust into an ETF on January 11th, a total of $2.8 billion has flowed out as of last Friday.

Grayscale GBTC has been established for 10 years, and its structure was previously a closed-end fund. By the time the spot Bitcoin ETF was officially approved, GBTC's assets under management had reached nearly $30 billion. Therefore, when GBTC transitioned into a more liquid spot ETF, early holders chose to sell off.

During the selling process, one institution attracted the attention of the cryptocurrency community - FTX.

It is reported that a large portion of the funds flowing out of GBTC originated from FTX's sale of 22 million shares worth $1 billion.

In other words, the funds flowing out of GBTC were not ultimately recovered or offset, and a significant portion of it was based on FTX being liquidated.

By the end of October 2023, the value of GBTC shares held by FTX was only about $597 million, while on the first day of trading of the Grayscale Bitcoin ETF on NYSE Arca, the closing price reached $40.69, which means that the value of GBTC shares held by FTX had risen to around $900 million at that time. Currently, the ownership of GBTC in FTX has been reduced to zero.

According to data from Cherokee Acquisition, an investment bank specializing in bankruptcy claims and providing liquidity for FTX creditors, the current trading price of FTX creditors is approximately 80 cents.

FTX announced bankruptcy in 2022, causing a large amount of users' funds to be unable to be withdrawn and significantly devalued. Its founder, SBF, was sentenced to prison last year after a lengthy trial.

Another reason is that, according to media reports, the trustee of the bankrupt cryptocurrency exchange Mt.Gox is preparing to repay Bitcoin and Bitcoin Cash (BCH) on Bitstamp and Kraken accounts.

According to CoinTelegraph, the trustee of Mt.Gox has contacted creditors to confirm their account details in preparation for repayment, and it is reported that at least two creditors have received funds.

It is expected that by October 2024, Mt. Gox will repay 142,000 BTC and 143,000 BCH to creditors, in addition to repaying 69 billion yen (approximately 510 million US dollars).

Mt. Gox, once the world's largest Bitcoin trading platform, officially filed for bankruptcy protection in 2014.

In summary, the increase in supply from both GBTC and Mt.Gox has brought continuous selling pressure to Bitcoin, leading to the current bear market situation.

Some users predict that Mt. Gox will supply 200,000 Bitcoins to the market in the next 2 months, and in addition, over 600,000 Bitcoins in GBTC will face repricing.

By April of this year, the market supply of Bitcoin will be halved, resulting in a reduction of 160,000 in annual supply.