Bitcoin and other cryptocurrencies were falling Wednesday amid creeping doubt that the U.S. government will soon approve Bitcoin exchange-traded funds. Approval still looks likely, but it would behoove investors to hedge their bets.

Bitcoin has fallen 5.6% to $42,466 over the last 24 hours. The largest cryptocurrency was falling back after it had broken through $45,000 for the first time in more than a year on Tuesday.

Most of the drop occurred soon after Matrixport, a crypto financial-services platform, predicted Wednesday that the Securities and Exchange Commission would reject all ETF applications in January. Matrixports head of research, Markus Thielen, wrote in the report that a denial by the SEC could temporarily push Bitcoin prices back to between $36,000 and $38,000, although he still expected the cryptocurrency to rise overall in 2024.

The report was in stark contrast to other analysts, who have expressed near certainty that the SEC will approve the Bitcoin ETFs as soon as this week. Analysts for Bloomberg Intelligence, for example, give a 90% chance of approval this monthin part because of scores of SEC filings by issuers including BlackRock, Fidelity and Invesco indicate heavy engagement by SEC staff on the funds. Multiple potential issuers of the ETFs have recently detailed their planned fees for the funds.

The SEC declined to comment.

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Doubts over the ETFs approval contributed not just to Bitcoins fall but to that of crypto-related stocks. Coinbase Global fell 4.25% in early trading to $150, while shares of Bitcoin mining companies Marathon Digital Holdings and Riot Platforms fell 2.5% and 5.2% respectively.

While ETF approval looks more likely than not, theres still reason investors should think twice before bolstering crypto-related bets as a result of it.

For one, as Wednesdays market reaction to the research report shows, it appears the market has already nearly priced in the ETFs approval. That makes the upside of approval minimal, but the potential downside severe if the SEC denies or delays the applications again.

Take prices of the Grayscale Bitcoin Trust ,

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That discount on Tuesday had narrowed all the way to 8%, indicating that investors have little doubt it will soon be able to convert.

Analysts at J.P. Morgan have forecast that even if approval is given, it could be a sell-the-news moment.

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Meanwhile, some policy analysts say the SEC could still seek to thwart the ETFs launches.

While ETF applicants have been iterating with SEC staff, we believe political forces are likely to override the process, resulting in further delay or denial of the updated ETF applications, wrote PolicyPartner analyst Matthew Wholey in a research note last week.

Wholey noted the Biden administration has identified crypto as a threat to financial stability if it becomes more connected to the traditional financial system without increased oversight of the markets that facilitate crypto trading.

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However, other analysts are more confident in Bitcoins rally.

We believe the fundamental backdrop for Bitcoin is solid at the moment, reflecting broad-based accumulation by long-term investors, slowing supply growth from the Bitcoin miners, and a very high likelihood that the long-debated physically-backed US exchange traded funds will eventually be approved, wrote Carsten Menke, head of Next Generation Research at Julius Baer, in a research note.

Meanwhile, analysts at AllianceBernstein wrote in a research note that Bitcoin could potentially end the year at around $80,000, according to MarketWatch, citing the potential ETF approval, the so-called halving event expected in April, and growing demand from companies.

Ethereum, the second largest cryptocurrency, was down 4.8% at $2,219. Among smaller cryptocurrencies, Solana dropped 9.9% and Cardano fell 9.1%. Dogecoin was down 10.5%.

Write to Adam Clark at adam.clark@barrons.com and Joe Light at joe.light@barrons.com

Read more from the original source:

Bitcoin Price Drops. Crypto Investors Should Hedge Their Bets. - Barron's