Investors in spot Bitcoin exchange-traded funds (ETFs) are predominantly utilizing this investment vehicle for arbitrage strategies, with only 44% of total inflows associated with long-term investments, according to a crypto research firm.
Since their launch in January 2024, spot Bitcoin ETFs in the United States have garnered approximately $39 billion in net inflows. However, Markus Thielen, head of research at 10x Research, noted that merely $17.5 billion—less than half—reflects true long-only buying.
Thielen highlighted that the majority of inflows, around 56%, is likely linked to arbitrage strategies, where short positions in Bitcoin futures balance out the inflows. This process, termed the “carry trade,” involves traders purchasing spot Bitcoin through ETFs while also shorting Bitcoin futures, thereby profiting from the disparity between spot and futures prices.
According to Thielen, this indicates that the actual demand for Bitcoin BTCUSD as a long-term asset in diversified portfolios “is considerably smaller than the media suggests.”
“Instead of demonstrating widespread institutional adoption, the buying and selling of Bitcoin ETFs is predominantly influenced by funding rates (basis rate opportunities), as many investors concentrate on short-term arbitrage rather than pursuing long-term capital growth.”
Thielen further pointed out that the primary holders of BlackRock’s IBIT ETF are hedge funds and trading organizations that “focus on exploiting market inefficiencies and seizing yield spreads” instead of assuming outright directional risks.
With current funding rates and basis spreads being too low to justify entering new arbitrage positions, “hedge funds and trading firms have ceased adding inflows to Bitcoin ETFs and are actively unwinding existing positions that no longer present the profitable arbitrage opportunities observed a few months back,” he said.
Last week witnessed four straight days of outflows, totaling $552 billion from these products, according to Farside Investors. In the meantime, spot Bitcoin stayed range-bound throughout the week.
“This negatively impacts market sentiment, as media reports often interpret these outflows as bearish indicators,” Thielen stated, adding that the unwinding process is “essentially market-neutral since it involves selling ETFs while simultaneously buying Bitcoin futures, thereby offsetting any directional market influence.”
Raoul Pal, CEO of Real Vision, expressed a similar sentiment in mid-2024, asserting that approximately two-thirds of the net inflows into spot Bitcoin ETFs might be stemming from arbitrage trading.
However, the tides may be changing. Thielen remarked that real purchasing flows “have certainly picked up” since the US presidential election.
“While true long-only Bitcoin purchases have risen since Trump’s election, funding rates have plummeted alongside declining retail trading volumes.”
Thus, when funding rates decrease, the strategy becomes less appealing, prompting trading firms to unwind their positions, which has been observable over the past week.
