Gather ’round, dear reader, for I have a tale of intrigue and arbitrage to share with you. It seems that the majority of investors in US Bitcoin ETFs have been using the vehicle for something other than hodling.
Since their launch in January 2024, these ETFs have attracted a whopping $39 billion in net inflows. However, only $17.5 billion, less than half, represents genuine long-only buying, according to 10x Research head of research, Markus Thielen.
The majority of these inflows, or around 56%, are likely tied to arbitrage strategies, where short Bitcoin futures positions offset inflows. This is what the experts refer to as the “carry trade” – a strategy where traders buy spot Bitcoin through ETFs while simultaneously shorting Bitcoin futures and profiting from the difference between spot and futures prices.
Thielen added that the actual demand for Bitcoin as a long-term asset in multi-asset portfolios “is significantly smaller than the media portrays.”
“Rather than reflecting broad-based institutional adoption, the buying and selling of Bitcoin ETFs is primarily driven by funding rates (basis rate opportunities), with many investors focusing on short-term arbitrage rather than long-term capital appreciation.”
The largest holders of BlackRock’s IBIT ETF are hedge funds and trading firms that “specialize in exploiting market inefficiencies and capturing yield spreads” rather than taking outright directional risk.
With funding rates and basis spreads currently too low to justify new arbitrage positions, “hedge funds and trading firms have stopped adding inflows to Bitcoin ETFs and are actively unwinding existing positions that no longer offer the profitable arbitrage opportunities seen a few months ago,” he said.
Last week saw four consecutive trading days of outflows, with $552 billion leaving the products. Meanwhile, spot Bitcoin remained range-bound for the week.
Thielen said that this hurts market sentiment, as media reports often frame these outflows as bearish signals. However, the unwinding process is “actually market-neutral since it involves selling ETFs while simultaneously buying Bitcoin futures, effectively offsetting any directional market impact.”
Real Vision CEO Raoul Pal said something similar in mid-2024 when he claimed around two-thirds of the net inflows into spot Bitcoin ETFs may be coming from arbitrage trading.
Tides may be shifting, however. Thielen said that real buying flows “have certainly picked up” since the US presidential election.
“While genuine long-only Bitcoin buying has increased since Trump’s election, funding rates have collapsed as retail trading volumes have declined.”
So when funding rates fall, the strategy becomes less attractive, causing trading firms to unwind their positions, which is what has been seen for the past week. 😲
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2025-02-24 07:24