Bitcoin Crash: Did Hedge Funds' 'Arbitrage Game' Fail?

In the past week, Bitcoin dropped from $99,000 to below $80,000, almost returning to the price level before the U.S. elections. Some say that the hedge funds' arbitrage strategy collapsed, dragging down the market.

What is arbitrage?

In the past few months, hedge funds have been making money using a 'sure-win' tactic:

On one hand, buying Bitcoin spot ETFs (BlackRock, Fidelity),

On the other hand, shorting Bitcoin futures on the CME,

Profiting from the price difference between the two, with an annual return of over 5%, and with some leverage, it could reach double digits.

This tactic had almost no risk, and the funds were enjoying it.

Why did it suddenly stop working?

This arbitrage relied on futures being more expensive than spot (premium). However, the market has recently faltered, the premium has shrunk, and trading profits dried up. As a result, the funds pulled out big time; Bitcoin was sold off aggressively, and the price couldn't hold.

It's quite alarming; in a week, $1.9 billion flowed out of ETFs, and CME futures contract volumes also plummeted, with Bitcoin dropping over 10% in just a few days. It was stable when prices were rising, but collapsed quickly when they fell. Hedge funds don't care at all about whether Bitcoin goes up or down; they only want to profit from the price difference. Now that there’s nothing to gain, they’re withdrawing, leaving the market hanging.

What will happen next?

Arbitrage is still being liquidated, and selling pressure continues.

Bitcoin needs real buyers to hold it up (not just funds looking to arbitrage).

Leverage liquidations haven't stopped, and volatility will be significant.

ETFs were originally a good thing, attracting long-term players, but they also attracted short-term arbitrage funds. Now that arbitrage can't continue, the outflow from ETFs has exacerbated the decline. Once the funds finish their liquidation, the downward trend may slow down. Some demand in the ETFs is fake; until real buyers step in, the market will still be shaky. The hedge fund arbitrage collapse is quite severe, but it also has to go through this pain. Excessive selling will eventually stop, and the next opportunity will come. Don’t panic now; holding on is the key.