Five Bitcoin ETF Warnings

While an ETF should be a net positive for the space, there are downsides to consider too.

Will the ETF turn out to have the impact traders expected?

The Bitcoin spot ETF is one of the most important events in Bitcoin's history—potentially the biggest development since the Genesis block. It's the moment at which bitcoin can finally become a part of the mainstream financial system, and announces that crypto is a legitimate asset class.

It's almost a certainty now that several spot ETFs will be launched within a week—and possibly even today, according to the rumors. (Since it also happens to be exactly 15 years since Bitcoin's launch, when the Genesis block was mined, it would be an auspicious day.)

Will The Market Buy, Sell, Or Ignore A Bitcoin ETF Approval?
There are several different ways the market could react to a spot ETF approval.

While opinions differ, we're in the camp that believes this will be a highly bullish development, both in terms of price action and public perception of bitcoin. But things rarely run as smoothly as the majority of people expect, and there are a number of ways in which spot ETFs might cast a shadow over the crypto space, over both the short term and the long term. We remain positive, but we'd be remiss not to look at the other side of this momentous event.

1) Sell The News

Firstly, there's the warning that some analysts are giving that ETF approval will be a classic "sell the news" event. The market has been anticipating the green light from the SEC for months, and 2023's spectacular run-up from $16,000 to $45,000 was largely driven by optimism around this. Once the decision has been made, profit-taking might be expected. In the short term, then, we could see a significant crash—whether brief or more protracted.

Permabears such as Peter Schiff warn that approval of an ETF without the new demand expected from institutions would be devastating, though of course Schiff is only reliable in the sense that he's an almost perfect contrarian indicator.

2) Volatility

Regardless of whether there's a sell-off at or after approval, there's going to be volatility. If the fake news about approval back in October is anything to go by, approval itself could be met with a significant green candle. Back then, traders uncritically took on board a rogue CoinTelegraph post on X and sent the market $2,000 higher in a matter of minutes, before the move fully retraced when the reality became clear.

Rogue CoinTelegraph ETF Post Prompts $30k BTC
CoinTelegraph’s post caused $100 million of liquidations, as BTC spiked and retracted by $2,000 in 20 minutes.

In the minutes and hours following approval, then, we can expect tens or hundreds of millions of dollars of liquidations in both directions. Add to this the fact that there will probably be a pause of several days (or maybe even weeks) before launch, and the market could get very choppy. Leverage traders, beware.

3) Centralization

Zooming out from the markets, the launch of spot ETFs may increase the centralization of bitcoin storage, posing a potential security risk. Of course, these institutional-grade systems are designed to be highly robust, but a digital vault containing billions of dollars worth of bitcoin is a honey pot for the world's most resourceful hackers.

Coinbase will be the custodian for the vast majority of ETFs. That's potentially a lot of bitcoin, all in one place.

ETF custody table
Coinbase will custody the majority of bitcoin held in ETFs

Against this, there's the fact that these coins will be protected by some of the best tech, and the best people, in the world. Coinbase has not suffered a significant hack in its entire history. Moreover, ETFs may take market share away from regular exchanges, which tend to have worse security, so this may prove a net positive.

4) Overhyping

When the bull market returns, so do the scammers, moonboys, and low-grade influencers posing as experts. The advice they give is uninformed and dangerously inaccurate. They will typically disappear in the bear market, but by then, the damage is done. Countless people will already have lost money when they listened to their overblown predictions for one or other crypto asset.

Those who have been around a while know to ignore these parasites. Bitcoin isn't going to $500k, or even $100k, in the next month. Many newcomers, though, will be suckered by them. The worst offenders are likely to be targeted by the authorities for giving financial advice without the necessary qualifications and licences. The more people get burned, though, the more negative publicity there is around crypto.

5) Too Much, Too Soon?

There's also the possibility that the hype around an ETF could push bitcoin into an early cycle peak. When the market rises too far, too fast, the move becomes unsustainable and a crash follows. A steady, sustainable rise, with healthy corrections along the way, is best over the long run.

But with the coming marketing blitz and potential retail and institutional FOMO, what if tens of billions of dollars are dumped into bitcoin in the early days and all the investment that might have taken place over the course of the coming years is actually front-loaded into the next few months?

That raises the possibility of a left-translated cycle, a bubble peak sometime in 2024, and a lengthy bear market: Not the best scenario for long-term adoption and legitimacy.

What Is A Left-Translated Bitcoin Market Cycle?
It’s possible that a flood of institutional capital could push BTC to an early cycle high.

Subscribe to our newsletter and follow us on X/Twitter.

Great! You’ve successfully signed up.

Welcome back! You've successfully signed in.

You've successfully subscribed to REX Wire.

Success! Check your email for magic link to sign-in.

Success! Your billing info has been updated.

Your billing was not updated.