Bitcoin big dump Hedging fund Arbitrage trading is the culprit?

Compiled by: 0xjs@Golden Finance

In just one week, the price of Bitcoin has dropped from $99,000 to below $80,000, nearly returning to the price level before the U.S. elections. Crypto analyst Kyle Chassé believes that one major reason for the recent sharp decline in BTC prices is the gradual fading of arbitrage trading by hedge funds.

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

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

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

But what about now? This arbitrage trade is collapsing.

2、This trade 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 will be the outcome?

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

3. Look at the brutal ETF outflows:

• In the past week, BTC sold for over 1.9 billion dollars,
• With the closing of the fund, CME’s open interest plummeted.
• BTC has fallen double digits in a few days, while the same arbitrage trades remained stable during the rise of Bitcoin, and are now accelerating the crash.

4. Why did this happen?

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

The trading has now ended, and they are pulling 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 a liquidity game.

ETFs have not only brought long-term holders but also hedge funds engaged 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, it’s just not as much as we imagine.
• This volatility and turmoil will continue until real buyers get involved.

8. Final thoughts:

• Closing positions in cash and arbitrage is brutal - but also necessary.
• ETF capital 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.