How deep is this crypto market correction?

The first trading week of the spot bitcoin ETFs is behind us. Analysts are calling it a big success, and this trading week, the ETFs are still posting impressive numbers. However, the price of bitcoin has taken quite a hit. Is bitcoin heading for a more extended correction?

This Weekly in brief:

• Market: The American ETFs have seen over $1 billion in inflow during the first eight trading days. However, the price of bitcoin is declining. It's not surprising to see a correction after an 80% rise in three months.
• News: In the US, a significant legal battle has begun between the SEC and Coinbase. Many analysts expect the SEC to come up short in this fight, which would be a relief for the American crypto sector.

Market update

In the past few days, there has been a lot of attention on the American spot ETFs. The two biggest newcomers, BlackRock and Fidelity ETFs, now hold over 30,000 bitcoins each, giving them a combined value of over $1 billion. These are exceptional performances for ETFs that have only been around for two weeks.

A significant portion of the inflow into the nine new ETFs likely comes from investors repositioning their holdings. For example, ARK Invest moves some of its holdings from BITO, a bitcoin futures ETF from 2021 to its own spot ETF. But most of the attention is on GBTC, the Grayscale fund that has been converted into a spot ETF.

GBTC started its life as an ETF with 619,162 bitcoins in its vault. After eight trading days, it now holds 536,695 bitcoins, representing an outflow of over 85,000 bitcoins. Investors wanting to exit GBTC is understandable. Its management fees of 1.5% are much higher than BlackRock's 0.25%. Additionally, this is the first time since spring 2021 that investors can sell their shares without facing a significant discount.

Among those selling GBTC shares are also trustees handling the fund's assets. Coindesk reports that FTX has sold around $1 billion worth of GBTC shares. There could also be GBTC share sales in the settlement of Genesis's bankruptcy.

However, when we add up the inflow and outflow from all ETFs, there is a net inflow of over a billion dollars. Given the exceptional outflow from Grayscale, this is surprisingly positive.

You wouldn't think that looking at the sentiment among crypto investors in recent days, which has been quite gloomy. The price of bitcoin has dropped about 15%, from $47,000 around the ETF launch to $40,000 now. Still, this is a relatively modest correction for now.

If you take a step back, you'll see that bitcoin investors still have reasons to be content. The price is still 50% higher than three months ago and twice as high as a year ago. Price fluctuations of 10-20% in a week are quite common.

However, the concern is valid. There are indications that we might be heading for a more extended correction. We are in the final part of the weekly cycle, and it's customary to end a months-long uptrend with a retracement of more than 25%.

The chart above gives a close look at the price. We are at the lower end of the December price range, with a floor at $40,000. We've also lost the upward trend from November.

The chart below takes a broader view of the price, with each bar representing a week. The current week is clearly below the 10-week average. The momentum indicator at the bottom suggests that we are entering the weaker part of the current weekly cycle.

The market can respond in two ways: a significant drop that could take us to around $33,000, or a more extended sideways period. For a quick breakout to the upside, the market would have to go against its natural rhythm, which would be quite exceptional.

News summary

Throughout the week, the focus shifted away from the bitcoin ETFs launched on January 10 and towards a significant legal battle between Coinbase and the US regulator SEC.

The lawsuit revolves around whether Coinbase is operating illegally as a securities exchange. The SEC accuses Coinbase of selling at least 13 crypto assets that should be considered securities. If the SEC prevails, it could have significant implications for the American crypto sector. With such a ruling, the regulator could classify a substantial portion of the crypto market as securities and subject it to regulation.

For this reason, Coinbase refuses to settle and has chosen to fight back. The initial battle is about whether the SEC even has the authority to initiate the case. Coinbase argues that the regulator is overstepping its bounds and wants the entire case dismissed.

Both parties presented their arguments in court on Wednesday. According to reporters, the judge was sharp and well-informed, casting doubt on the regulator's actions. The Wall Street Journal aptly described it as "Judge Questions SEC’s Claim to Regulate Coinbase."

Elliott Stein, a legal specialist and analyst at Bloomberg, expects that the judge will entirely reject the case brought by the SEC. Stein wrote on X (formerly Twitter) that he initially entered the courtroom with the expectation that at least some of the regulator's claims would stand. However, he left the court expecting "that Coinbase will win complete dismissal."

If that turns out to be the case, the SEC will face another painful legal defeat. This would not only be a sensitive matter but also have concrete consequences for other cases initiated by the regulator. A decision is expected before the summer.

Other news:

• More than 20 bitcoin miners are preventing methane from entering the atmosphere. These companies contribute 1.2% of the network's total computational power and neutralize 7.3% of the emissions from the entire network. This is because methane is a highly potent greenhouse gas, being 84 times more powerful than carbon dioxide according to the IPCC. Currently, there is no other industry that manages and reduces its externalities in this manner.
• Trezor has announced that personal data of 66,000 customers has been compromised by criminals. This includes the names and email addresses of customers who have contacted Trezor's online customer service since December 2021. If you receive unsolicited emails from Trezor, be aware that it may be phishing. The assets of Trezor users have not been at risk.
• There are 24% fewer developers active in the crypto sector than last year, according to the most recent Developer Report from Electric Capital. However, analysts remain optimistic: "the most valuable segment, developers active in the sector for more than two years, continued to grow steadily." A quarter of all developers are from the United States, which has lost 14% of its market share since 2018.