Why bitcoin ETF approval could spark profit taking

While the markets await an SEC green light, the crypto is gaining for now.

Bitcoin has jumped on bets that the first US exchange-traded funds investing directly in the token are set to be approved. The question now is whether an actual green light for the products would spur some profit-taking.

The largest digital asset is up 16% this week and at one point topped $35,000 for the first time since 2022. In contrast, global stocks are wilting under elevated Treasury yields and deepening geopolitical gloom.

Digital-asset fans argue the spot ETFs planned by the likes of BlackRock Inc. will spur wider Bitcoin adoption. But the timing of any approval from a wary Securities and Exchange Commission remains uncertain. Mainstream demand has also been hurt by crypto blowups such as the bankruptcy of the FTX exchange.

“Markets have priced in a Bitcoin spot ETF approval and I expect a sell-the-news event if it’s approved,” said Hayden Hughes, co-founder of social-trading platform Alpha Impact.

Technical chart patterns below hint that the Bitcoin rally has become stretched, while options bets indicate some speculators see a possible runway to $40,000 before the token stalls. Bitcoin was steady at $34,475 as of 7:12 a.m. in London on Thursday after more than doubling this year following a deep rout in 2022.

TECHNICAL TEST

Fibonacci ratios — proportions found in nature that are also used to help identify market reversals — indicate a zone just below $36,000 poses a challenge for the Bitcoin bounce. The zone is delineated by the 38.2% Fibonacci retracement of Bitcoin’s one-year plunge through November 2022.

Cici Lu McCalman, founder of blockchain adviser Venn Link Partners, said she expects short-term selling if US spot Bitcoin ETFs are approved but added that the products would be “bullish” for the token longer term.

‘OVERBOUGHT’ RSI

Bitcoin’s weekly relative-strength index, a momentum gauge, topped the 70 level for the first time since 2021. A reading above 70 is viewed as “overbought,” suggesting reduced odds for a repeat of recent furious rallies, such as two separate 10% intraday jumps.

“The frenzied speculation about the upcoming ETF approval may be a symptom of other more structural bullish factors, such as the steady clean-up of the previous year’s industry excesses, and a renewed inflation hedge narrative given the macro environment,” said Caroline Mauron, co-founder of digital-asset derivatives liquidity provider OrBit Markets.

DERIVATIVES INSIGHT

Derivatives data from Deribit, the biggest crypto options exchange, show a significant concentration of bullish bets on Bitcoin reaching $40,000 by the end of the year. That would represent a 16% advance from current levels.

JPMorgan Chase & Co. strategists including Nikolaos Panigirtzoglou wrote in a note that they expect the SEC to approve multiple spot Bitcoin ETFs by a Jan. 10 deadline. “Any rejection could trigger lawsuits against the SEC creating more legal troubles for the agency,” they said.