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Bracing for Impact: SEC’s Potential Rejection of Bitcoin ETF Could Trigger 20% Price Plunge

Cryptocurrency enthusiasts might need to temper their expectations for an imminent approval of spot bitcoin ETFs by the US Securities and Exchange Commission (SEC). According to a recent report from Matrixport, there’s a growing likelihood that the SEC might defer greenlighting these ETFs until at least Q2 of 2024. This anticipated decision could send shockwaves through the crypto market, potentially triggering a sharp 20% decline in Bitcoin’s value.

Matrixport’s analysis suggests that despite ongoing discussions between ETF applicants and the SEC, critical regulatory benchmarks remain unmet. “We could see Bitcoin prices declining by -20% very quickly, falling back to the $36,000/$38,000 range,” the firm cautioned. This drop could lead to “cascading liquidations,” with most of the $5.1 billion in perpetual long Bitcoin futures potentially unwinding.

The SEC, under Chair Gary Gensler, appears to be maintaining a cautious stance towards cryptocurrency. Gensler’s approach indicates that he perceives the industry as still in its infancy and needing substantial maturation. The approval of a spot bitcoin ETF is seen as a crucial step in accelerating this development, but political dynamics, including the Democrat-leaning composition of the SEC Commissioners, might hinder this process, particularly as it involves legitimizing Bitcoin as a viable store of value.

Matrixport points out that of the $14 billion injected into crypto since September, about $10 billion hinges on the expectation of an ETF approval. However, Stefan Rust, CEO of Truflation, aligns with Matrixport’s view, suggesting that regulators are seeking more time to establish control mechanisms over the decentralized nature of cryptocurrencies.

Given these circumstances, Matrixport advises traders to prepare for a possible non-approval scenario. If no green signal is given by January 5, traders should consider hedging their long exposure by purchasing $40,000 strike puts for the end of the month or even shorting Bitcoin via options.

Despite the potential for a near-term setback, Matrixport remains optimistic about Bitcoin’s prospects for the year, predicting that its value will still close 2023 above $42,000. This outlook is buoyed by several positive factors, including the upcoming US election and advancements in Bitcoin mining, particularly this year’s halving event.

As the crypto community watches closely, Bitcoin, which enjoyed a 150% surge in 2023, faced a 5% decline on Wednesday, trading around $43,780. The next few weeks could be pivotal for the future trajectory of this digital asset.