Bitcoin’s Recent Slump: A Look at the Factors Contributing to its Downward Trend

ETF Outflows and Hedge Fund Shorts: Key Contributors to the Sell-Off

According to Geoffrey Kendrick, head of digital asset research at Standard Chartered, the current downward trend in Bitcoin’s price is driven by continued ETF outflows and mounting hedge fund short positions. He notes that the market’s recent weakness is concerning, particularly given the absence of extended breaks enjoyed by other markets.

“It is at the end of weeks like this that digital asset participants wish the asset class closed for the weekend.”

Kendrick highlights the significance of Bitcoin’s drop below $80,000, a level once considered a key resistance point following Trump’s election victory. This raises questions about the potential extent of the sell-off.

ETF Outflows and Hedge Fund Shorts: A Growing Disconnect

Kendrick’s analysis points to significant ETF activity as a harbinger of further declines. He notes that Bitcoin ETF outflows almost reached $1 billion on February 25, a critical threshold. Despite this, he believes the sell pressure may not be over.

Kendrick also highlights a growing disconnect between ETF positioning and hedge fund short exposure based on CFTC data. He observes that since the US election, ETF positions surged from $23.5 billion to a peak of $40.2 billion, before declining to $37.0 billion. Hedge fund shorts, on the other hand, increased from $7.9 billion to $11.3 billion as of February 18.

“ETF positions are up 71% since November 5, but hedge fund shorts are up only 43%. This implies there is still a lot (the majority) of outright longs in the ETFs. To the degree these stem from underlying retail flow, I think they remain at risk of panic selling.”

Geopolitical and Regulatory Uncertainty: A Concern for Risk Assets

Kendrick reiterates his earlier caution regarding downside risks, warning that Bitcoin’s key convexity risk level of $90,000 has been breached. He notes that lower US Treasury yields might offer long-term support, but cautions against buying the dip before a more decisive dip.

Looking Ahead to the Weekend: A Skeptical Outlook

Kendrick expresses skepticism that risk assets will rally over the weekend, citing looming geopolitical tensions and tariff implementations. He notes that while the market has had a chance to absorb the news, he doubts a rally will occur.

“Probably fair to assume we have had the Trump tariff noise now… But are risk assets really going to rally into the weekend now we have had the bad news? I doubt it.”

Potential for Further Decline: A Look Back at August 2024

Kendrick recalls a similar period in August 2024, when panic selling pushed Bitcoin below $50,000 after a rapid 5.5% decline. He notes that a similar decline could see Bitcoin slide into the $69,000 to $76,500 range.

Conclusion

The recent slump in Bitcoin’s price is attributed to continued ETF outflows and mounting hedge fund short positions. The market’s lack of extended breaks and growing disconnect between ETF positioning and hedge fund short exposure contribute to the sell-off. As the market looks ahead to the weekend, concerns about geopolitical tensions and tariff implementations may weigh on risk assets.

FAQs

Q: What are the key factors driving the current downturn in Bitcoin’s price?
A: Continued ETF outflows and mounting hedge fund short positions are contributing to the sell-off.

Q: What is the significance of Bitcoin’s drop below $80,000?
A: This level was once considered a key resistance point, and its breach raises questions about the potential extent of the sell-off.

Q: What is the current outlook for risk assets?
A: Kendrick is skeptical that risk assets will rally over the weekend, citing looming geopolitical tensions and tariff implementations.