Bitcoin once tested the $40,000 mark, the first Bitcoin ETF has fallen by more than 30

Crypto markets saw a broader pullback as expectations for an early rate hike by the Federal Reserve mounted. Over the weekend, Bitcoin approached $40,000 for the first time since late September, down about 42 percent since its peak three months ago, and about 10 percent since the beginning of 2022. Ether has not been spared either, with popular DeFi tokens such as Uniswap and Aave facing downward pressure.

Bitcoin once tested the $40,000 mark, the first Bitcoin ETF has fallen by more than 30%

Matt Maley, chief market strategist at Miller Tabak+ Co., said:

"If the Fed becomes more aggressive, risk assets, including cryptocurrencies, will be more vulnerable."

Mike McGlone, an analyst at Bloomberg Intelligence, said that $40,000 per coin is an important technical support level for Bitcoin. The downside in cryptocurrencies is a barometer of the current decline in risk appetite. But he expects bitcoin to eventually become the benchmark collateral as the digital age dawns.

Bitcoin goes further into the mainstream as institutional and retail investors flood the crypto market. Now the Fed has become more hawkish, and riskier assets such as stocks and digital assets have been affected.

Add to this the fact that Bitcoin and other cryptocurrencies are “notorious” for their volatility, sometimes experiencing huge price swings in just a few minutes, often exacerbated by reduced trading volume on weekends.

Matt Hougan, chief information officer at Bitwise, said the price slump is justified as the Fed begins to withdraw from stimulus more aggressively. Bitcoin's downturn is likely to continue for a while, as there is a lack of obvious short-term catalysts to help turn things around. However, he added:

“Even if prices are volatile, the fundamentals of cryptocurrencies are stronger than ever, and in the long run, the fundamentals will win.”

The continued downturn of Bitcoin has made the first Bitcoin futures ETF (BITO) in the United States “peak when it debuts”. It has now become one of the top 10 funds with the worst performance two months after its listing, with a drop of more than 30% within two months.

Athanasios Psarofagis, an ETF analyst at Bloomberg Industry Research, said:

"Holding an ETF and waiting for yield can be tough. Although you haven't heard much about it performing poorly since it went live."

The first-day turnover of BITO was close to US$1 billion, setting a second-highest record in history. This is significant for the crypto industry and highlights the huge pent-up market demand for Bitcoin. But BITO fell nearly 9% last week alone. Money flow data shows that investor enthusiasm is fading. The fund has not seen a day of inflows since the start of the year in 2022.

BITOs are based on futures contracts and are filed under mutual fund rules required by SEC Chairman Gary Gensler, offering "significant investor protections." The U.S. has yet to approve a Bitcoin spot ETF due to numerous regulatory issues. Nonetheless, Psarofagis stated:

"BITO's performance to date doesn't necessarily affect future industry growth. You can see some other ETFs have a rough start, but they can still raise capital in the long run."

Eric Ervin, CEO of Blockforce Capital, said the decline across the asset class could be the start of a “mini bear market.” New investors may exit, and long-term holders will become major owners.