Investors are losing interest in Bitcoin futures as they await the approval of a Bitcoin Exchange-Traded Fund (ETF).

Bitcoin derivative sentiments have turned bearish ahead of the SEC's decision on spot BTC ETFs on January 10th.

Bitcoin’s Roller Coaster Ride: SEC, ETFs, and Market Volatility

Bitcoin’s price experienced a wild swing on January 9th, as investors scrambled to make sense of a misleading tweet by the United States Securities and Exchange Commission (SEC) regarding the approval of spot Bitcoin exchange-traded funds (ETFs). The price fluctuated between $44,745 and $47,910 in less than 30 minutes, leaving everyone on edge.

SEC Chair Gary Gensler later clarified that the tweet was unauthorized, causing Bitcoin’s price to stabilize around $46,000. However, this incident raised concerns among investors that the approval odds for the ETF decision on January 10th might be affected.

The SEC’s Impact on Spot ETF Approval

According to Jesse Berger, the author of Magic Internet Money, the SEC’s unauthorized tweet could serve as an excuse to delay the approval of the spot Bitcoin ETF. This situation has led to doubts about the ETF’s chances of being approved on time.

It’s important to note that the ARK 21Shares Bitcoin ETF is the only one with a January 10th deadline, while other issuers like BlackRock, Bitwise, Fidelity, and VanEck expect a final decision by March 15th. This distinction explains why senior Bloomberg ETF analysts hesitate to estimate approval odds above 90%, considering that the regulator might require additional time.

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Another factor mentioned by Bloomberg’s James Seyffart is the possibility of the SEC denying the spot ETF, although he finds it unlikely. The basis for such a negative outcome could be factors beyond the previously mentioned market manipulation risks or even a direct order from the administration of U.S. President Joe Biden.

Taking it a step further, Hoeem, the author of the “Seven C Newsletter,” highlighted how a simple social media post can potentially manipulate Bitcoin’s price. This argument could be used to deny the ETF, although it is not considered a base case scenario.

Hoeem’s hypothesis holds more truth than we might think. Bitcoin has struggled to sustain $45,000, experiencing a 4.3% drop from the previous day’s level of $47,000. Furthermore, the Bitcoin futures premium has hit its lowest point in three weeks, a clear indication of reduced demand for leverage longs (buyers).

Diminished Demand for Bullish Positions in Bitcoin Derivatives

Professional traders prefer monthly futures contracts due to the absence of a funding rate, which allows these instruments to trade 5% to 10% higher than regular spot markets. This premium justifies the longer settlement period.

Data shows that the two-month Bitcoin futures premium (basis rate) declined to 12% on January 10th, matching its lowest level in three weeks. Although still above the 10% threshold, this drop reflects a decreased demand for leverage longs compared to the levels seen on January 2nd, which were above 20%. This scenario is unexpected if the approval odds for the spot Bitcoin ETF stand at 80%.

The decline in the Bitcoin futures premium could be influenced by the growing demand for hedging Grayscale Bitcoin Trust (GBTC) fund exposure. GBTC shares have been trading at a discount to the Bitcoin equivalent holdings since February 2021. However, if Grayscale’s spot ETF fund conversion gets approved by the SEC, GBTC holders will be able to redeem their shares at face value. This opens up an arbitrage opportunity where investors can buy fund shares and sell the equivalent in BTC futures to hedge their exposure.

To gain further insights, traders should also analyze the options markets to gauge investors’ sentiments. The 25% delta skew, which reflects the difference in pricing between upside and downside protection, is an important indicator. If traders anticipate a Bitcoin price drop, the skew metric will rise above 7%. Conversely, phases of excitement tend to have a negative 7% skew.

Looking at the 25% delta skew for Bitcoin options, it remains within the neutral range, although it has moved closer to the 7% bearish threshold. This suggests that any excessive optimism has been wiped out after the unexpected volatility on January 9th.

While it would be premature to conclude that market approval odds have dropped below 80% based solely on Bitcoin derivatives markets, it is clear that the current sentiment is less bullish compared to the previous week.

Q&A

Q: What are the chances of the spot Bitcoin ETF getting approved?

A: The approval odds for the spot Bitcoin ETF are uncertain. While many factors like market manipulation risks and administrative decisions come into play, the recent SEC debacle has introduced additional complications. It would be difficult to estimate approval odds above 90%.

Q: How can a mere social media post affect Bitcoin’s price?

A: The recent incident involving the unauthorized tweet from the SEC shows how Bitcoin’s price can be “manipulated” by information circulating on social media. This raises concerns about the potential impact on the ETF approval process, although it is not the base case scenario.

Q: What has caused the decrease in demand for leverage longs in Bitcoin futures?

A: The decline in demand for leverage longs in Bitcoin futures could be attributed, in part, to investors seeking to hedge their exposure to the Grayscale Bitcoin Trust (GBTC) fund. If Grayscale’s spot ETF fund conversion gets approved, GBTC holders will be able to redeem their shares at face value, leading to potential arbitrage opportunities.

Future Outlook and Investment Recommendations

As we move forward, it is essential to closely monitor the developments surrounding the spot Bitcoin ETF approval. While the recent market volatility has cast some doubts, the overall sentiment remains positive. However, it is advisable for investors to exercise caution and assess the evolving landscape before making any investment decisions.

Considering the potential impact of the spot Bitcoin ETF approval, it might be wise to diversify one’s investment portfolio. Investing in a range of assets, both within and outside the cryptocurrency space, can help mitigate risks and capture opportunities in different market conditions.

Continuing research and staying informed about regulatory developments, market trends, and investor sentiments are crucial for making sound investment decisions in the ever-evolving world of cryptocurrencies.

References:

1. BTC Price $43K: Smart Money Bets Big on Bitcoin Ahead of Potential BTC ETF Approval
2. SEC Chair Gary Gensler Tells CNBC Commission Taking New Look at Spot Bitcoin ETFs
3. SEC Delay of Spot Bitcoin ETF Approval Adds to Comments in Recently Submitted S1 Forms
4. US Senators Seek Gary Gensler’s Report on X Breach, Deadline Monday

Image: Bitcoin annualized futures premium versus spot price. Source: Laevitas

Image: Bitcoin 30-day options 25% delta skew. Source: Laevitas

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What are your thoughts on the recent volatility in Bitcoin’s price due to the SEC’s unauthorized tweet? Do you think it will have a long-term impact on the ETF approval? Share your opinions below and let’s discuss!

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