Foresight News Today, Bitcoin fell below $90,000. I warned about this major drop in my article "4.3 Billion Outflows! Opportunities and Risks of Bitcoin" published on February 19. Last week, $571 million continued to flow out of Bitcoin ETFs (see chart below). This was interpreted by the market as smart money fleeing, which contributed to Bitcoin's break below $92,000. However, Markus Thielen, Head of Research at 10x Research, explained the "real" reason for last week's capital outflows in a report - it was not smart money fleeing, but rather arbitrage traders exiting their positions.

1. Did Arbitrage Traders' Exit Cause the Big Drop?

Thielen pointed out that since the launch of the U.S. spot Bitcoin ETF in January 2024, while net inflows were around $39 billion, only $17.5 billion (about 44%) was from long-term holders. The remaining 56% of the funds may have been related to arbitrage strategies, where investors buy the spot Bitcoin in the ETF and simultaneously short Bitcoin in the futures market to profit from the spot-futures price spread. Thielen emphasized that this suggests the actual demand for Bitcoin as a long-term asset may be far lower than the media has portrayed. I don't fully agree with this view, and I'll explain my reasons later. Thielen believes that ETF trading is primarily driven by the funding rate (basis rate), and many investors focus on short-term arbitrage rather than long-term capital appreciation. As the funding rate and basis spread have declined, arbitrage opportunities have diminished, causing hedge funds and trading firms to stop adding more capital to Bitcoin ETFs and start unwinding those positions that no longer offer attractive arbitrage opportunities. The declining trend of the funding rate (yellow line in the chart below) seems to validate Thielen's assessment.

2. How Important is Leverage Control?

This sentiment naturally also provides opportunities for centralized exchanges and market makers to exploit retail traders, so it's not surprising that Bitcoin suddenly dropped below $90,000 and may continue to decline. Those with power will not lend, and those without will not borrow. At the time of writing this article, $560 million in long positions have been liquidated, and more are likely to come. I've always emphasized that high leverage is just giving money to centralized exchanges. You must always remember that the pricing power of cryptocurrencies is now in the hands of centralized exchanges, which are opaque and unregulated. If you're still doubtful about this, you can read this article. Also, don't think that once Bitcoin falls below $90,000, it's all over. Sentiment can be continuously amplified, otherwise there wouldn't be people being scared to death. Further drops below $80,000 or $70,000 are not impossible.

3. Centralized Exchange Bitcoin Reserves Hit New Lows

However, it's not all bad news in the market. One fact worth noting is that: More Bitcoin is accelerating its outflow from centralized exchanges. Currently, the spot Bitcoin reserves of centralized exchanges have hit a new all-time low, down to only 2.4 million BTC.

By further analyzing the chart, we can find that the exchange with the largest Bitcoin outflow is Binance, followed by OKX and Bybit. Over the past 7 days, Binance has seen an outflow of $712 million worth of Bitcoin, which is equivalent to around 7,500 BTC at $95,000 per coin.

I believe that the increased outflow of Bitcoin spot is strongly correlated with the outflow of Bitcoin ETFs. The outflow of Bitcoin ETFs is not only due to the lack of arbitrage opportunities, but also because a significant portion has been converted to holding Bitcoin spot. This can be attributed to the demonstration effect of MicroStrategy (now called Strategy).

Because, regardless of how low the management fees of current Bitcoin ETFs are, there is still a cost, which can be completely eliminated by holding the spot.

Looking at the chart above, you will find that the premium opportunities for Bitcoin ETFs are decreasing, while the discounted opportunities represented by the dotted line are increasing. The dividend from GBTC's ETF has been largely consumed, and it will soon disappear. More institutional investors, unless absolutely necessary, are more willing to hold Bitcoin spot rather than ETFs.

Conclusion

The massive outflow of Bitcoin from exchanges is a very good thing.

Because when the spot Bitcoin trading volume on centralized crypto exchanges is lower than that of ETFs, the pricing power of Bitcoin may shift to the stock market, which is now under strict regulation. At that time, the various situations of retail investors being exploited, such as needle sticking, U-shaped, and N-shaped, will be reduced, and your leverage can be increased, but for now, it's best not to exceed twice.

Remember, for now, controlling your desires is an important rule for survival in the crypto dark forest. Only by avoiding liquidation can you have the chance to see the day when Bitcoin reaches $42.3 million.