The eleven U.S.-listed cash exchange-traded funds (ETFs) have seen a net inflow of $1.2 billion so far this month, reversing redemptions from December, according to SoSoValue data.
Although the inflows figure is positive, a deeper analysis of the data reveals an even stronger bullish signal: large investors are abandoning their usual arbitrage plays and betting more on a possible long-term price rise.
$1.2 Billion Bitcoin ETF Inflow This Month (SoSoValue)
Let’s break it down.
For a while, big investors used a boring (but safe) strategy called “Cash-and-Carry” arbitrage to profit from bitcoin trading.
The trade operated for a while by exploiting the price mismatch between the spot and futures markets. However, the latest influx of U.S.-listed Bitcoin exchange-traded funds (ETFs) suggests traders are seeking increasingly directional bullish bets, moving away from sophisticated arbitrage play.
Think of commerce this way: Imagine buying a gallon of milk for $4 today because someone signed a contract to buy it from you for $5 next month. You don’t care if the price of milk crashes or skyrockets in between, because you’ve already locked in your $1 profit.
In the crypto world, investors did this by buying bitcoin ETFs for cash and “shorting” (betting against) bitcoin futures contracts. This was not a rise in the price of Bitcoin; it was simply a matter of pocketing the small price difference between the two.
Read more: Bitcoin Futures ETFs can increase cash and carry returns
Now that the gap between “now and later” has narrowed and the costs of financing this type of trade have increased, the trade has lost its luster, or so the data shows.
But big investors are still looking for exposure to bitcoin, which has led them to abandon sophisticated trading and play the old-school way: betting on the potential for long-term price rises.
The disappearing profit
While U.S. spot ETFs saw a net inflow of $1.2 billion, the total number of standard and micro bitcoin futures contracts open or active on the CME increased 33% to 55,947 contracts.
This combination of ETF inflows and increased CME open positions is commonly associated with cash-and-carry arbitrage.
However, the latest ETF inflows are unlikely to be part of carry trades, as the “basis” – the price spread between CME futures and spot ETFs – has narrowed to levels that barely cover transaction costs and funding expenses.
“This view is reinforced by the currently moderate monthly basis of around 5.5%. After accounting for funding and execution costs, implied carry appears close to zero, providing limited incentive to re-engage in the trade,” Mark Pilipczuk, research analyst at CF Benchmarks, told CoinDesk in a Telegram message.
One of the main reasons is probably how annoying price fluctuations have been for Bitcoin. Since the sharp decline from its all-time high in October last year, the price of bitcoin has been “stuck” around 90,000.
Lower volatility, lower risks of price mismatch and less profitable to trade the “spread”. And the data shows exactly that.
Bitcoin’s 30-day annualized implied volatility, as represented by Volmex’s BVIV Index, fell to 40%, the lowest since October. This shows that expectations for price turbulence have reached a three-month low, according to analysts at cryptocurrency exchange Bitfinex.
“Sticky” bullish bets
This change marks a significant shift in the market microstructure, and it is bullish for Bitcoin.
Make no mistake: Investors continue to flock to cash ETFs, as evidenced by the $1.2 billion in flows. But bets are not intended for carry trade; They are rather in favor of a direct increase in prices for long-term investments.
Bitfinex analysts call these new investors “sticky” because they are not in it for quick profits based on price differentials, but are in it for the long term, given that the volatility is gone. Essentially, large institutions feel safer diversifying their money into alternative assets like bitcoin, which lags other assets like precious metals and stocks.
“Institutions generally add [longer-term] Exposure during low volatility regimes and as liquidity gradually moves down the risk curve following the rally in gold and silver,” the analysts said, explaining the ETF inflows.
Simply, these investors are not in it for the “quick money,” looking to play for five minutes; This is “sticky” money from serious investors who want to stay in the market for the long term.
Rise of “speculators”
So who are these “sticky” investors who bet on the upside and don’t put in arbitrage bets?
The answer lies in data on how many investors are shorting Bitcoin.
On CME-listed Bitcoin futures, open interest increased, driven by speculators betting on a bullish outcome rather than selling short in carry trades. In this country, non-commercial traders or large speculators seek profits rather than hedge risks via short sales, implying that they have increased their bullish exposure, leading to the recent growth in open positions.
“Participation from non-commercial traders – a category that captures more hot money – increased significantly. Open interest in CME Bitcoin futures held by this group stood at over 22,000 contracts, largely in line with the recent improvement in price sentiment,” Benchmarks’ Pilipczuk said.
This suggests that the latest expansion in open interest was primarily driven by institutional speculators, such as hedge funds, seeking exposure to long-term rising bitcoin prices via regulated futures markets, rather than through a re-exploitation of basis trades, he added.
He further said that leveraged funds, or hedge funds, which are typically short futures contracts in carry trades, have been steadily reducing their short exposure.
