The price of Bitcoin has experienced a significant decline, falling over 33% from its record peak near $126,000. This drop has erased weeks of gains and triggered widespread liquidation across the cryptocurrency sector. As of early December, Bitcoin is trading in the range of $84,000 to $86,500, with fear indicators signaling caution. Many investors have opted to secure profits, while institutional selling has intensified the downward trend.
Concurrently, US spot Bitcoin Exchange Traded Funds (ETFs) have recorded some of their largest redemption figures to date, fueling a debate about their impact on Bitcoin's price trajectory.
ETF Outflows and Their Impact on Bitcoin's Price
Analysts at Citi Bank have re-ignited a discussion by suggesting that ETF outflows are a direct contributor to Bitcoin's price decline. Their report calculated that for every $1 billion withdrawn from US spot ETFs, Bitcoin's price experiences a 3.4% drop. This analysis portrayed ETF flows as a principal driver of the downward momentum observed in November.
However, Eric Balchunas, a senior ETF analyst at Bloomberg, strongly contested this view. In a post on X, he argued that the Citi model overlooks the substantial year-to-date inflows of $22.5 billion into Bitcoin ETFs. Balchunas pointed out that if Citi's logic were applied consistently, Bitcoin should have seen a 77% gain this year, highlighting an inconsistency that exposes flaws in the correlation.
Balchunas emphasized that ETFs represent only about 3% of the total selling pressure in the market, and attributing the decline solely to them oversimplifies the complex dynamics of cryptocurrency trading.
Data from SoSoValue indicates that US-listed Bitcoin ETFs experienced withdrawals totaling $3.79 billion in November, exceeding the previous record of $3.56 billion set in February. BlackRock's iShares Bitcoin Trust (IBIT) led these redemptions with $2.47 billion withdrawn, followed by Fidelity's Wise Origin Bitcoin Fund (FBTC), which saw $1.09 billion in outflows. Together, these two funds accounted for over 90% of all redemptions, concentrating the selling activity among large institutional investment vehicles.
Alex Sonders, a strategist at Citi, explained that the creation and redemption mechanisms of ETFs are directly linked to Bitcoin's spot price. Authorized participants are required to buy or sell Bitcoin to balance investor demand, thereby influencing market prices.
The Selloff Extended Beyond ETFs
The selloff in the cryptocurrency market was not confined to ETF outflows. Open interest in Bitcoin derivatives saw a 35% drop from its October peaks, according to CoinGlass. Traders who had previously relied on leverage were forced to liquidate their positions entirely, fearing a repeat of a significant market wipeout event. By the end of November, Bitcoin's market structure exhibited clear signs of risk aversion, with margin exposure collapsing and liquidity pools thinning.
More recent ETF data has indicated a brief recovery in flows. Farside Investors reported net inflows of $8.5 million on a recent Monday, marking the fourth consecutive day of positive movement. While IBIT experienced $74 million in redemptions, FBTC attracted $67 million, and ARK Invest's ARKB added $7.38 million, contributing to an overall aggregate inflow. Despite this improvement, Bitcoin struggled to maintain its rebound, slipping from $92,000 to $86,500 within two trading sessions.
Vanguard Made A Headline-Grabbing Policy Reversal
In a significant policy shift, Vanguard, a brokerage firm serving 50 million clients, has reversed its stance and now permits the trading of crypto-focused ETFs and mutual funds. This marks a notable departure from its previous position, where it characterized cryptocurrencies as "too speculative." Effective immediately, Vanguard clients can trade funds with exposure to Bitcoin, Ethereum, XRP, and Solana, representing a historic step towards mainstream cryptocurrency integration.
Andrew Kadjeski, head of brokerage and investments at Vanguard, commented on the resilience of crypto ETFs, noting their ability to maintain liquidity even during periods of high volatility. He emphasized that these funds have functioned as intended, effectively managing both redemptions and new inflows, even during significant price shocks.