- Bitcoin ETF investors rush to liquidate holdings.
- The profitable premium that drove the arbitrage strategy has dried up.
- Concerns mount over a possible major capitulation.
Bitcoin exchange-traded funds were once a darling of professional traders eager to seize on price gaps to make outsized returns.
Now, that trade is fizzling out. Traders are fleeing from that once-juicy arbitrage opportunity, dubbed the market-neutral basis trade. That’s triggering $2.3 billion in outflows in Bitcoin ETFs and sending Bitcoin’s price below $86,000.
And Bitcoin’s funk may be just getting started.
“I do not think the selloff is over yet,” Geoffrey Kendrick, global head of digital assets at UK bank Standard Chartered, said in a note on Wednesday. “The big capitulation is yet to come.”
Analysts at 10x Research estimate that 56% of Bitcoin ETF buying activity so far has been tied to hedge funds that have deployed arbitrage strategies such as the basis trade.
The strategy exploited the premium between short-term contracts of CME Bitcoin futures and the real-time price of Bitcoin.
It worked well last year, especially in the last four months of 2024, when demand for CME Bitcoin futures — measured in outstanding contracts, or open interest — tripled to $23 billion.
At the same time, Bitcoin’s price had jumped more than 60% since September to reach as high as $109,000 last month.
However, demand for CME Bitcoin futures has slumped 25% since peaking in mid-December.
Also, the gap between the prices of the Bitcoin futures contracts and spot Bitcoin has shrunk to its lowest level since September 2023, according to data from crypto brokerage firm K33 Research.
Macroeconomic factors haven’t helped. The decline has coincided with a stock market selloff as Federal Reserve Chair Jerome Powell signalled he’ll keep interest rates higher.
Meanwhile, US President Donald Trump has threatened tariffs, and Walmart gave a grave warning about consumer demand.
And last week, JPMorgan analysts said Bitcoin futures were approaching backwardation ― when Bitcoin’s spot price trades higher than that of its futures contracts.
Hedge funds that were exploiting the spread are now liquidating Bitcoin ETF shares.
In the past week, Bitcoin ETFs have bled $3 billion.
The outflows are generating a vicious cycle: The wave of hedge funds selling ETFs means the issuers of those Bitcoin funds must sell the underlying Bitcoin that back the ETFs to redeem withdrawals. This knock-on effect is clobbering the price even more.
Bitcoin traded at $86,000 on Thursday, down 20% from its $109,000 peak a month ago.
Osato Avan-Nomayo is our Nigeria-based DeFi correspondent. He covers DeFi and tech. Got a tip? please contact him at osato@dlnews.com.
