Bitcoin’s correction: ETF flows and why relief may be near

I apologize in advance. I usually don’t mind writing very late, but I’m just back from afar and the jet lag is brutal. It won’t allow me to stay awake for long. Still, I think it’s the right moment to give a BTC update. So forgive me if the delivery feels a bit rough — the value is really in the content.

We haven’t said much during this correction simply because there was nothing to say. We couldn’t identify anything that suggested we were nearing the end of the pullback, nor anything confirming the opposite. We were right in the middle of nowhere. Sometimes that’s just the truth. Even Michael Saylor probably had no idea where we were. Writing an update at that point would have only added noise.

Now the picture is a bit different. Something tells us we could be about to see at least a relief rally, if not the resumption of the uptrend. Before diving into this, let’s start with a short recap.

Drop in context

Bitcoin’s realized volatility has been unusually low this year, making us forget its true wild nature. For us, the abnormal thing this year was the absence of strong pullbacks since April, not the magnitude of what we are currently seeing.

As I’m writing tonight, Bitcoin is down about -26% from its all-time-high daily close. This is almost exactly in line with the typical size of a pullback during a bull market. Earlier this year, during the tariff drama, Bitcoin dropped -28%. During the long summer 2024 correction, Bitcoin also went down -26% from daily high to daily low, with a dramatic spike reaching -32%. During the summer 2023 correction, Bitcoin only fell -20%, which fit the low-volatility behavior of the early bull market. But in the previous cycle, in the same Blue environment we are in now, Bitcoin had a -25% pullback when it first reached 40k (with a brief peak at -30%), and later experienced a similar move in October 2021 (-23%) before pushing on to that cycle’s all-time high. We also had the mini-bear caused by China’s great disconnect from the Bitcoin mining ecosystem, where we dropped -55%, but that’s another story — and one we all hope never repeats.

All this to say that, when we put things in perspective, what we’re living through right now is unpleasant but completely in line with Bitcoin’s historical behavior. It’s still far too early to call for the apocalypse or pronounce the B(ea)r word.

Why is Bitcoin going down?

The current selling is closely tied to the stock market, and this is something I’ve warned about countless times over the past few months. Cycle timing probably doesn’t mean much anymore. What pushed Bitcoin so far this cycle was the ETF flows, and those same flows now make it much more vulnerable to the stock market’s fate. In other words, what pushed it up can just as easily push it down.

And indeed, right now, everything on the Bitcoin blockchain is business as usual. The number of newly created addresses with a non-zero balance — which usually drops sharply when sentiment truly turns bearish — has simply continued sideways at a perfectly acceptable level by the standards of the last two years.

Hodlers are also doing what hodlers always do during corrections after a panic phase: they are holding.

So like I said, what’s going wrong for Bitcoin right now is not Bitcoin. It’s the ETF flows.

Here is today’s ETF heatmap:

It shows just how much the ETFs bled again. Last week alone, ETFs saw a combined outflow of 1.1 billion dollars, with BlackRock’s IBIT leading the way at 532 million leaving the fund.

The reason for these outflows is not necessarily a shift toward a bearish long-term view on Bitcoin. It is rather the overlap of two forces: a general risk-off move in the stock market, combined with a very specific technical circumstance.

On the stock side, we are nearing a correction point. Even though the major indices are still not far from their all-time highs, market breadth has been deteriorating for months.

When market breadth weakens while the index remains elevated, this is a strong sign of risk-off behaviour — and Bitcoin has always been heavily correlated with those moves.

The second reason is more technical. Instead of summarizing it myself, here is what TradingNews wrote about it:

Many retail traders misread ETF flow as direct institutional belief in Bitcoin. The reality is much more mechanical. When the basis between ETFs and CME futures widens enough, hedge funds buy ETF shares and short futures simultaneously, creating the appearance of strong inflows. When that basis narrows, the trade no longer pays, and the same institutions unwind positions, producing the impression of mass selling. This explains why Bitcoin rallied earlier this year even as dollar liquidity tightened, and why it is now falling sharply despite no major structural deterioration in network fundamentals. ETF flow is not sentiment; it is arbitrage math.

The positive angle in all of this is that the correction we’re experiencing right now is not being driven by a strong bearish view on Bitcoin itself. It’s driven by external factors affecting the broader trade setup. This doesn’t mean the correction can’t continue, because Bitcoin alone may not be strong enough in the current environment to push against those forces, especially the strong risk-off tone in the stock market. But we definitely should not consider the Bitcoin trade dead for this cycle.

Why we think we could be about to see some relief

We believe we may already have gone through most of this move, and that we might not be far from a point where it could start to reverse. Not only does Bitcoin currently have no fundamental bearish outlook, but as we’ve shown above, the correction we’ve lived through fits perfectly within what we normally see in bull-market pullbacks over the last five years.

Beyond the healthy on-chain picture — hodlers hodling and new participants staying active — other data also support the idea of a potential reversal point. The spread of our BWR ribbons is now at an extreme level, one that Bitcoin usually doesn’t go much past.

The relationship between Bitcoin’s market value and realized value (the MVRV Z-Score) is also at a point where it has consistently reversed during the current bull market.

But among all indicators, the one that truly pushed us to write this update tonight is our beloved MLDP Z-Score, which is currently sitting at -2.1 standard deviations. This is an incredibly rare occurrence, as you can see here:

This strongly suggests that Bitcoin’s price right now doesn’t reflect the health of its ecosystem. Typically, when this indicator reaches such levels, it happens during much larger moves — and those larger moves are usually accompanied by a true shock in network participation. That is clearly not the case this time.

This matches the view expressed above (and in the TradingNews note): what we are seeing is a very localized trade unwinding in Bitcoin ETFs, pushing the price down sharply without reflecting a broader bearish outlook on Bitcoin itself.

If Bitcoin is truly destined to go further down, it is unlikely to do so in a single straight-line move. Doing so would push this indicator into completely uncharted territory. Statistically, seeing at least some relief first — if not the end of the correction altogether — is the more probable scenario.

The most likely scenario

Even if I think we are nearing the end of the current move, I believe there is still a tiny bit more to see. Bitcoin usually bounces only once it has clearly found its footing — meaning a strong bounce inside a single hourly candle at a well-defined level. That’s typically where traders re-enter and start bidding the price back up. This hasn’t happened yet, but this is where I would personally be looking to buy the dip.

Another point that supports this view is our BTC version of the Bandbreaker indicator we use on the stock market. It printed an oversold signal early in November before the rally that carried Bitcoin back near 108k, but it has not printed another oversold dot yet.

What I could see is some sort of stabilization — a bull/bear fight over the next days — which would bring the upper bands closer to the price action. Then, once everything tightens, a sharp move down that quickly reverses.

In a variation of this scenario, if Bitcoin doesn’t stabilize first and the price action is meant to go tag one of these Bollinger bands, get ready for a wild candle — one that could briefly show a very discounted price that won’t last long.

This is what we believe is (are!) the most likely short-term scenario. But on the longer term, things are much more uncertain. As we’ve said many times, the traditional four-year cycle is no longer an absolute truth for Bitcoin. Larger forces are now at play. One of these forces — and we’re seeing it very clearly right now — is the stock market and the way ETF flows weigh on Bitcoin.

If you’ve been following our S&P 500 indicators, you know we are getting close to the point where the Hedge signal could trigger. If it does, the moderate pullback we are currently seeing on the S&P 500 could gain intensity and momentum. This would certainly put additional pressure on Bitcoin.

But those thresholds, as much as they mark the optimal frontier between small pullbacks and sharp ones, are also often the optimal points of reversal. That could happen too, and the bull market could resume. After all, it has now been almost two months since our market breadth indicators have been steadily degrading and the environment has been risk-off. This rarely lasts that long in a single stretch. Even during the 2022 bear market, where the trend was down, most breadth corrections lasted less than two months before bouncing.

All this to say: Bitcoin’s longer-term future probably lies in the stock market’s hands right now, and on that side, we are approaching a major decision point. This is what we will be monitoring very closely to determine the most probable outcome of the inevitable incoming bounce.

Bitcoin is currently reminding us of its true wild nature, which is unpleasant in the moment. But the same volatility that makes these pullbacks difficult is also what fuels the explosiveness on the way back up. Historically, what follows these kinds of corrections are very strong moves to the upside.

We will keep you informed.