One possible answer? Cash and arbitrage trading.
In the past three weeks, net inflows into BTC ETFs exceeded 2.5 billion dollars. But during this period, the price dropped from 71,400 dollars (May 20) to 67,400 dollars (June 12). Why did 2.5 billion dollars of new funds flow into the ETF, yet the price did not rise?
On the surface, we think that this recovery of net inflows should be favorable for prices. Surprisingly, this is not the case.
One possible answer? Cash and arbitrage trading.
Let me explain.
ETF Flows
After a long period of consolidation, fund inflows have recently reopened a strong upward trend. But this has been accompanied by a surge in prices. Thanks to @FarsideUK for the chart.
Who holds the ETF
When we look at the top 80 holders of different BTC ETFs, we find that most of these individuals are not just 'buy and hold' investors. Instead, we see many hedge funds on this list, which often have complex trading ideas. Thanks to @dunleavy89 for the chart.
CME Futures Market
Now in terms of the futures market, we see that at the same time, the open interest of CME Bitcoin futures is also approaching a historical high of 11.5 billion dollars.
Digging a bit deeper, we can analyze the net positions of CME futures by trader category.
Here, we note that hedge funds have established increasingly large net short positions on Bitcoin futures (with 6.3 billion dollars of net shorts on CME Bitcoin futures alone).
What does this mean?
One possible explanation is that an increasing number of sophisticated traders are starting to engage in cash and arbitrage trading of BTC. This is an arbitrage strategy where traders take advantage of price differences between two similar securities.
Here, it involves going long on BTC through the spot ETF and shorting futures for the same amount to capture the basis between the two, thereby establishing a net neutral position.
Thus, the price risk is zero, and the profit potential is huge (theoretical impact on price is zero).
Now, the returns from this strategy are very attractive, and we see a strong positive basis in the market (futures prices are higher than spot prices). Thanks to @JSeyff for the chart.
Of course, we are not sure what exactly happened behind the reduction, but I believe that this cash and arbitrage trading can well explain the current situation. If this is true, it means that the large new funds currently flowing into the spot ETF are just neutral net positions established by arbitrageurs (not affecting prices).
Therefore, unfortunately, there has not been a significant influx of new marginal funds into the market, which can explain the recent price movements. In any case, this is just one idea that I find attractive. And as more data emerges, ideas do tend to change frequently.
