Bitcoin big dump. Is the hedging fund arbitrage trading the culprit?

Compiled by: 0xjs@Golden Finance

The price of bitcoin fell below $80,000 from $99,000 in a week, almost falling back to the pre-election level of bitcoin in the United States. Crypto analyst Kyle Chassé believes that one of the main reasons for the recent sharp drop in BTC prices is that hedge funds' carry trades are gradually fading.

The following explains how this arbitrage trading works—and why the collapse of arbitrage trading can create shockwaves in the market.

1. For several months, hedge funds have been using 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 price difference with an annualized return rate of about 5.68%, with some even using leverage to boost 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 dropped significantly. What will the result be?

• This trade is no longer profitable.
• Funds are being withdrawn on a large scale.
• BTC selling pressure surges.

3. Look at the brutal ETF outflow:

• In the past week, BTC sold over 1.9 billion dollars,
• With the fund liquidation, CME open interest plummets,
• BTC has fallen by double digits in a few days, while the same arbitrage trade remained stable during the rise of Bitcoin, and is now accelerating its collapse.

4. Why does this happen? **

Because hedge funds do not care about Bitcoin. They are not betting on Bitcoin's skyrocketing. 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 the liquidity game.

ETFs have not only brought long-term holders but also hedge funds that engage in short-term arbitrage. Now we are seeing the consequences.

7. Important conclusion?

• We do not know if the pain has ended, but once these trades are fully 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 turmoil will continue until real buyers get involved.

8. Final Thoughts:

• Cash and arbitrage liquidations are brutal - but also necessary.
• ETF capital outflow = 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.