Introduction
Since July 5, Bitcoin has seen net inflows of $1.91 billion into its US spot exchange-traded funds (ETFs). Despite this, its price has struggled to stay above $65,000. Understanding why this is happening involves looking at several factors in the financial markets and how they affect Bitcoin (BTC).
Arbitrage Trading and Bitcoin ETFs
One reason Bitcoin’s price isn’t rising despite the surge in ETF inflows is arbitrage trading. Some investors buy spot ETFs not to hold Bitcoin long-term but to use these shares for other financial trades. Hedge funds, in particular, use arbitrage strategies to profit from market inefficiencies without betting on price movements.
For example, the cash and carry trade involves selling Bitcoin futures while buying the equivalent spot ETF position. This means they aren’t necessarily betting on Bitcoin’s price going up.
Hedge Funds and Arbitrage Trades
Major hedge funds like Millennium Management, Schonfeld Strategic Advisors, Jane Street, HBK Investments, Susquehanna International, and Bracebridge Capital are involved in these arbitrage trades. These funds don’t typically hold Bitcoin long-term or believe strongly in its value. Instead, they focus on making profits from market differences.
The Chicago Mercantile Exchange (CME) Bitcoin futures open interest, which measures the total active contracts, is currently $10.2 billion, up 23% from the previous week, according to CoinGlass data. This suggests many hedge funds are looking to profit from the premium on BTC futures contracts, currently at an annualized rate of 11%.
Spot Bitcoin ETF Buyers and Market Impact
Not every spot Bitcoin ETF buyer is betting on BTC price upside. Some buyers might have shifted away from spot positions for tax reasons or to use shares as collateral for traditional finance trades. The increase in CME’s BTC futures open interest partially explains the limited impact of the spot ETFs net inflow. Even though these funds eventually cover their futures market short positions, the market impact is neutralized by the sale of the spot BTC position.
Influence of Traditional Finance Markets
Bitcoin’s underperformance isn’t linked to traditional finance markets. On July 16, the S&P 500 index reached an all-time high, and gold, considered the world’s largest reserve asset, traded at a historical high on July 17. These events show that Bitcoin’s challenges are unique to its market.
Decreasing Demand for Inflation Hedges
Another factor is the drop in demand for inflation hedges. Bitcoin is often seen as a hedge against inflation because of its fixed supply. However, US inflation is decreasing, and US Treasurys are strengthening, showing confidence in the Federal Reserve’s strategy.
The US Treasury 5-year yield fell to 4.07% on July 17 from 4.43% on July 1, indicating higher demand for these bonds. Investors accept lower yields for these safe assets or expect lower inflation ahead. This trend is unfavorable for Bitcoin, which is an alternative store of value.
Bitcoin’s Appeal and US Economic Confidence
Bitcoin’s main appeal lies in its predictability and independence due to its hard monetary policy and decentralized network. This narrative is stronger when central banks struggle, such as with a collapsing currency or lack of trust in the government’s ability to repay debt.
However, as US inflation drops and confidence in the economy grows, Bitcoin’s appeal as a store of value weakens. Positive macroeconomic data, like a strong US economy, can negatively impact Bitcoin’s price, even with spot ETF inflows.
Institutional Investors and Bitcoin’s Price
Institutional investors play a significant role in Bitcoin’s price dynamics. Hedge funds engaged in arbitrage trades are not typical long-term holders. Their strategies include using BTC futures contracts and spot positions to profit from market inefficiencies.
These funds are also influencing the CME Bitcoin futures market. The increase in open interest and the annualized premium rate indicate that many institutional investors are involved in trading BTC futures. This activity affects Bitcoin’s price movement, making it challenging to rally above $65,000.
Conclusion
In summary, Bitcoin’s price struggles despite the surge in spot ETF inflows due to several factors. Arbitrage trading, decreasing demand for inflation hedges, and the influence of traditional finance markets all play a part. Hedge funds using arbitrage strategies and the overall confidence in the US economy also impact Bitcoin’s price.
Understanding these dynamics helps explain why Bitcoin’s price isn’t rising as expected, even with significant inflows into spot ETFs. Investors and traders need to consider these factors when analyzing Bitcoin’s market behavior and future price movements.
