Over the past three weeks, BTC ETFs have seen net inflows of over $2.5 billion. But during this period, the price fell from $71,400 (May 20) to $674,000 (June 12). Why did the price not rise when $2.5 billion in new money flowed into ETFs?
On the surface, we thought this recovery in net inflows should be positive for prices. Surprisingly, this was not the case.
One possible answer? Cash and carry trades.
Let me explain.
ETF Flows
After a long period of consolidation, inflows have recently reopened a strong uptrend. But this was followed by a surge in prices. Chart credit: @FarsideUK
Who owns ETFs?
When we look at the top 80 holders of the different BTC ETFs, we see that most of these people are not just “buy and hold” investors. Instead, we see a lot of hedge funds on this list, who often have complex trading ideas. Credits to @dunleavy89
CME Futures Market
Now on the futures market side, we see that at the same time, open interest in CME Bitcoin futures is also approaching a new all-time high of $11.5 billion.
Going a little deeper, we can analyze the net position of CME futures by trader category.
Here we notice that hedge funds have been building up an increasingly large net short position in Bitcoin futures ($6.3 billion net short in CME Bitcoin futures alone).
what does that mean?
One explanation could be that more sophisticated traders are beginning to trade BTC in cash-and-carry transactions, an arbitrage strategy where traders take advantage of the price difference between two similar securities.
Here, it involves long BTC via the spot ETF and short by the same amount to capture the basis between the two, thereby establishing a net neutral position.
Therefore, the price risk is zero and the profit potential is huge (theoretically the impact on price is zero).
Right now, the returns on this strategy are very attractive and we are seeing strong contango in the market (futures prices are higher than spot prices). Chart courtesy of @JSeyff
Of course, we don’t know for sure what is happening behind the drawdown, but I think this cash and carry trade is a good explanation for the current situation. If true, it means that a lot of the new money flowing into cash ETFs right now is just a neutral net position (not price-affecting) established by arbitrageurs.
So it's a shame there isn't a ton of new marginal money flowing into the market, which would explain the recent price action. Regardless, it's just an idea that I find attractive. And ideas do change frequently as more data becomes available.
What about you, what do you think about this situation?
