As the SEC’s decision on bitcoin ETFs looms, market participants prepare for market impact. Analysts reflect on the possibility of a “buy the rumor, sell the news” situation.

A Bitcoin ETF Approval Could Trigger Major Market Movements

With the cryptocurrency community eagerly anticipating the SEC’s decision on several pending bitcoin ETF applications, and the likelihood of approval appearing strong, many are now pondering how to position themselves for such an outcome. It is possible, for example, that the notable rise in Bitcoin’s price over the past year, especially since the precipitous run-up starting in September 2023, has been savvy market participants front-running the approval announcement. In which case the prudent thing to do might be to sell into the announcement of approval. The imminent decision, expected between Jan. 8 and 10, has investors and analysts weighing the implications of an approval on bitcoin’s price dynamics.

The current setup appears to be a classic “buy the rumor, sell the news” scenario. The concept of “buy the rumor, sell the news” is a common phenomenon in financial markets, where asset prices tend to increase in the lead-up to anticipated events due to markets acting as forward pricing mechanisms. Theoretically, given sufficient information, announcements such as the much-telegraphed bitcoin ETF approval should already be reflected in the market price of the asset at the time of the announcement.

However, once the anticipated event actually occurs and becomes public knowledge, some investors may choose to sell their shares to realize gains. This can happen even if the news is positive because the market might have overestimated its impact, or simply because investors are taking profits. Essentially, the actual event may not provide as much of an additional positive impact as the initial rumor or expectation did. This pattern is particularly relevant in the volatile and sentiment-driven cryptocurrency market, where news and expectations can significantly influence prices.

Senior Analyst Vetle Lunde from K33 Research puts the ETF approval being a sell-the-news event at 75%. “Everything points towards traders being considerably exposed ahead of the verdict, with derivatives pushing massive premiums following BTC’s last three months of continuous upside momentum. A sell-the-news event could become a self-fulfilling prophecy as a non-significant share of short-term market participants has eyeballed the event as an area for profit taking.”

History might provide some insight. bitcoin has experienced “sell the news” events before. Notably, in 2017, Bitcoin’s value peaked at $20,000 after the CME Group’s launch of Bitcoin futures. Similarly, in 2021, Bitcoin reached another high of $65,000 following Coinbase’s successful IPO, only to see its value decline in the subsequent months.

Capriole Investments, in an update post, recommended caution in the lead-up to a potential ETF approval, seemingly in anticipation of short time frame sell-the-news style price action. “In the more likely scenario that approvals do occur in January, we must wonder how much more short-term upside can be expected following approval?” On higher time frames it’s a different story: “the ETF approval will be a major catalyst that will open up a lot of long-term capital flows into Bitcoin”

The importance of time frame was present in every analysis of Bitcoin price action after approval, with general agreement that over longer time horizons the approval would be bullish for bitcoin. Michael Anderson of Framework Ventures summed it up well in a recent episode of Hidden Forces.

I would actually say that, yes, there are a lot of people that are already in the market that recognize the potential of these rulings, the potential of these approvals, and that’s where the run-up has been so far. But what really matters is what happens after the approvals and after the launches. Because that’s when the real buying starts.

Do you think a Bitcoin ETF approval would be a sell-the-news event? Share your thoughts and opinions about this subject in the comments section below.