The Bitcoin price has fallen below the $39,000 mark, the lowest level since December 2. This significant decline can be attributed to three major factors that have collectively contributed to the current market sentiment and price action.
#1 Selling pressure from Grayscale’s GBTC outflow
The market has been heavily influenced by the continued outflows from the Grayscale Bitcoin Trust (GBTC). Bloomberg analyst James Seyffart commented about the seriousness of the situation, stating: “Wef. BAD day for Bitcoin ETFs in general in the Cointucky Derby. GBTC saw more than $640 million outflow today. The outflow does not decrease, but increases. This is the largest outflow yet for GBTC. The total amount to date is $3.45 billion.”
Nevertheless, volume on Bitcoin ETFs remained very strong, surpassing $2 billion, with GBTC accounting for more than half of this volume. Total volume for the first seven trading days approached $19 billion.
Interestingly, while GBTC saw significant outflows, the broader Bitcoin ETF landscape paints a different picture. Excluding Grayscale, the nine new ETFs have collectively amassed 95,000 Bitcoin ($3.8 billion), in stark contrast to the 65,000 Bitcoin ($2.9 billion) that flowed out of GBTC.
22,000 BTC come from sales from the FTX Estate, meaning they do not flow to others. While the end of this supply glut is generally positive for the market, it remains critical to monitor whether outflows from Grayscale continue or intensify even after the end of the FTX-related sell-off.
#2 Futures and options markets are cooling
A major contributor to Bitcoin’s price movement below $39,500 is the cooling of activity in the futures and options markets. Particularly the open interest in CME Bitcoin futures experienced a sharp decline, with over $1.64 billion lost following the adoption of spot BTC ETFs, indicating a reduction in market leverage and speculative interest.
Crypto analyst Skew as long as a nuanced analysis of market dynamics, with a particular focus on the interaction between Bitcoin perpetual futures (perps) and the spot market. Skew noted: “There is nothing compelling yet in the offender market, other than shorts becoming the dominant position in the market at the moment. Perp premiums are common during periods when spot limits are selling at the price. Spot premiums, especially when perpetrators push the price into limit bidding areas on spot exchanges.”
This observation indicates a shift towards bearish sentiment in the perps market, with short positions taking precedence. The analyst also highlighted the current market’s lack of volatility and urgency, attributing this to reduced open interest and a focus on spot market flows.
Options analysis platform Greeks.live sheds further light on market sentiment added insights into the options market, specifically the behavior of Bitcoin’s implied volatility (IV) and volatility risk premium (VRP). They noted: “Bitco fell below $40,000 as short-term IVs recovered. Overall, the VRP has risen and the Skew curve is skewed towards put options.”
This shift to put options means an increase in the number of market participants hedging against further downside risks, adding to bearish sentiment. However, Greeks.live also pointed out that despite the bearish forces and the presence of panic orders, the market as a whole is still witnessing a balanced play between bulls and bears.
#3 Sentiment Shift – Calls for $35,000 are getting louder
The third crucial factor influencing Bitcoin’s price drop below $39,500 is a notable shift in market sentiment, highlighting the need for a correction after a prolonged bullish period. Charles Edwards, the founder of Capriole Investments, expressed the current state of the market, highlighting the abnormality of recent price developments and predicting an inevitable return to volatility.
Edwards declared“We’re still not there yet. This setback is long overdue and lower is healthier.” Pointing out the rarity of current market conditions, he noted: “It has now been more than 232 days since Bitcoin had a decline of more than 25% in the previous 12 months. The last time this happened was over ten years ago, in 2011! The current period of low downside volatility is NOT normal. These dips usually occur every 2-3 months. Volatility will return.”
The recent price correction, seen by analysts as a healthy and overdue adjustment, has nevertheless created a sense of panic among traders and investors. Market sentiment has taken a negative turn, especially as Bitcoin experiences a -20% dip, a move partly attributed to Grayscale’s supply overhang.
The once robust bullish optimism has waned and has been replaced by louder calls for a further decline to $35,000 or even lower. This shift in sentiment is reflected quantitatively in the Bitcoin Fear & Greed Index, which has moved to a neutral position of 50, marking a significant departure from the extreme greed observed during the uptrend.
At the time of writing, BTC was trading at $39,219.
Featured image from iStock, chart from TradingView.com
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