As the cryptocurrency market continues to evolve, the introduction of Bitcoin BTC/USD exchange-traded funds (ETFs) has led to unexpected outcomes, with volatility levels reaching new heights.
What Happened: Bitcoin’s volatility has surged, contradicting expectations that ETFs would stabilize the cryptocurrency market, CNBC reported on Monday.
Bitcoin reached a new peak last week, marking its first record in over two years, only to plunge by up to 10% and then soar to another record high. The 30-day historical volatility index for Bitcoin is at an 11-month high, reflecting increased leverage in crypto trading.
Citi analyst David Glass noted that while ETFs were anticipated to temper volatility, the recent leverage and sharp price movements have instead led to greater short-term volatility. Funding rates for Bitcoin futures have spiked, indicating a surge in demand for leveraged crypto exposure, particularly ahead of the anticipated halving event next month.
Open interest in Bitcoin futures is at record levels, suggesting more liquidity and potential volatility. U.S. Bitcoin ETFs, which started trading in January, were supposed to offer a regulated entry point into the crypto market for investors.
Despite the current fluctuations, Glass predicts that volatility will decrease as funding rates normalize.
"Realized crypto [volatility] will likely ease as funding rates normalize. However, the path to get there could be highly volatile given the increased leverage in the system,” he said.
Glass also suggests that portfolio rebalancing should mitigate volatility.
Investors have been cautioned about possible steep corrections through March. Technical analysis indicates support at around $48,000, significantly below Bitcoin’s current price after hitting new highs. Meanwhile, Enclave Markets CEO David Wells believes that ETFs will eventually lead to steadier inflows, akin to automatic investments in retirement accounts, which could smooth out Bitcoin’s volatility in the long run.
"Anytime you reach a multi-year, all-time high, volatility will be higher until that level is broken and becomes [a] new support level," Wells added.
Why It Matters: Bitcoin ETFs have become a focal point in the cryptocurrency landscape, offering investors a new avenue to engage with Bitcoin. Indian investors now have access to U.S. Bitcoin Spot ETFs, thanks to the crypto investment platform Mudrex. This move allows for regulated investment into Bitcoin, with the option to invest in individual ETFs or curated baskets.
Moreover, BlackRock’s iShares Bitcoin ETF (IBIT) has quickly surpassed MicroStrategy in Bitcoin holdings, amassing 195,985 BTC in less than two months. This rapid accumulation underscores the significant impact ETFs are having on the market, potentially reshaping the dynamics of Bitcoin ownership and investment strategies.
Price Action: At the time of writing, BTC was trading at $72,009, up 4.84% over the last 24 hours, according to data from Benzinga Pro.
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