Bitcoin big dump Hedging funds arbitrage trading is the culprit?

Compiled by: 0xjs@Golden Finance

In a week, the price of Bitcoin fell from $99,000 to below $80,000, nearly reverting to the price level of Bitcoin before the US election. Crypto analyst Kyle Chassé believes that one major reason for the recent sharp drop in BTC prices is the gradual decline of arbitrage trading by hedge funds.

The following describes how this arbitrage trade operates—and why the collapse of arbitrage trading can create shockwaves in the market.

1. For several months, hedge funds have been utilizing BTC spot ETFs and CME futures for low-risk yield trading. The operation is as follows:

• Purchase Bitcoin Spot ETF (BlackRock, Fidelity)
• Short BTC futures on CME,
• Earn a spread with an annualized return rate of approximately 5.68%, with some even using leverage to increase the return rate to double digits.

But what about now? This arbitrage trade is collapsing.

2、This transaction relies on the BTC futures trading premium being higher than the spot price. However, with the recent market weakness, the premium has significantly decreased. What is the outcome?

• The trade is no longer profitable.
• Funds are exiting on a large scale.
• Selling pressure on BTC surges.

3. Take a look at the brutal ETF outflows:

• Over the past week, BTC sold for more than 1.9 billion dollars,
• With the fund closing positions, CME's open interest plummeted.
• BTC has fallen by double digits in just a few days, while the same arbitrage trade remained stable during the rise of Bitcoin, and is now accelerating its collapse.

4. Why is this happening?

Because hedge funds do not care about Bitcoin. They are not betting on a surge in Bitcoin. They are just seeking low-risk returns.

The trading has now ended, and they are withdrawing liquidity - letting the market free fall.

5. What will happen next?

• Cash and arbitrage will continue to close positions.
• BTC needs to find real organic buyers (not just hedge funds extracting profits).
• As leveraged positions continue to be liquidated, volatility will remain high.

6. This is a typical case of liquidity games.

ETFs not only brought long-term holders but also hedge funds engaging in short-term arbitrage. Now we see the consequences.

7. Important conclusions?

• We do not know if the pain has ended, but once these trades are completely closed, the pain is likely to end.
• The "demand" for ETFs is real, but some of it is purely for arbitrage. The demand for holding BTC is real, just not as much as we imagine.
• This volatility and turbulence will continue until real buyers get involved.

8. Final Thoughts:

• Closing positions in cash and arbitrage is brutal - but also necessary.
• ETF outflows = more forced selling, but this impact will ultimately prepare for the next round.
• Survive now, accumulate later.
• Pain creates opportunities. Just don't get liquidated.