As the Bitcoin market continues to evolve, hedge funds are gradually becoming the dominant players in this financial game. According to a market analysis report by 10x Research , although the Bitcoin spot ETF attracted a large amount of capital inflows in early 2024, more than half of the funds came from arbitrage trading rather than real long-term investment. In addition, MicroStrategy (now called: Strategy), as a highly leveraged alternative to Bitcoin, also operates funds through market mispricing, further affecting market price trends. This series of phenomena shows that the Bitcoin market has gradually shifted from a stage dominated by retail investors to a new era controlled by hedge funds and institutional capital.

Does the inflow of funds into Bitcoin ETF really represent long-term demand?

Since its launch in January 2024, Bitcoin spot ETFs have attracted $38.6 billion in net inflows, which at first glance appears to indicate a high level of institutional interest in Bitcoin. However, the report pointed out that only 44% of this (about US$17.5 billion) was true long-term buying, and the remaining 56% came from arbitrage transactions.

The so-called arbitrage trading mainly obtains the interest rate difference by short Bitcoin futures and buying ETFs, which means that most of the capital flows are actually not related to the long-term value of Bitcoin, but for short-term arbitrage opportunities. Therefore, the general market belief that ETFs represent the degree of institutional adoption of Bitcoin is not entirely accurate, because the actual long-term holding demand is far lower than market expectations.

Hedge funds become major players in ETFs

The report further revealed that the main holders of Bitcoin ETFs are not traditional asset management companies, but mainly hedge funds and trading institutions. For example:

• The major holders of BlackRock IBIT (Bitcoin ETF) include well-known hedge funds such as Brevan Howard, Symmetry, DE Shaw, Tudor, Farallon, as well as market makers Susquehanna and Jane Street.
• The Fidelity Bitcoin ETF is held by Millennium, Schonfeld, Capula, DE Shaw, Bracebridge and other institutions.

The main goal of these hedge funds is not to hold Bitcoin for the long term, but to take advantage of market arbitrage opportunities. However, when market arbitrage opportunities decrease, these funds may withdraw funds, leading to greater market volatility.

Arbitrage opportunities are reduced and market sentiment is cooling down

According to the report, the Bitcoin market is currently facing a reduction in arbitrage opportunities, which has led to a slowdown in ETF flows:

1. Funding Rate Declines: One of the main drivers of arbitrage trading in the market is Bitcoin’s funding rate. However, after reaching a peak of +16.5% in November 2024, it has fallen to +6.2% in February 2025, below the +10% threshold for arbitrage strategies, causing hedge funds to no longer actively deploy funds.
2. Impact of the Fed’s policy: Stronger-than-expected U.S. economic data led the Fed to maintain its hawkish stance, further suppressing market demand for leveraged trading.
3. Retail investor trading volume declined: It was originally expected that the inauguration of US President Trump in 2025 would boost market activity, but with the sharp drop in $TRUMP coins, retail trading momentum has declined, leading to further weakness in market activity.

These factors combined to cause Bitcoin ETFs to experience their third monthly net outflow in history in February 2025, making market sentiment conservative.

MicroStrategy’s Arbitrage Strategy: A Bitcoin Leverage Tool Misunderstood by the Market

The report also specifically analyzes how MicroStrategy (MSTR), a company with a large Bitcoin holding, conducts capital operations through market mispricing.

In November 2024, MicroStrategy issued additional shares when the market was at its hottest. At that time, the market value of its shares was equivalent to 2.8 times its Bitcoin holdings. In other words, MicroStrategy sold shares at a price 180% higher than the market price of Bitcoin, raising funds in this way and further purchasing Bitcoin.

However, when market arbitrage opportunities decreased, MicroStrategy's stock price began to fall. The report estimates:

• MicroStrategy's stock price is currently around $300, but based on the Bitcoin it holds, its intrinsic value is only $158-$177.
• This means that MicroStrategy is still overvalued by 70-90% and may fall further to a reasonable valuation range in the future.

MicroStrategy Convertible Bond Trading: Hedge Fund Arbitrage

In addition to stocks, MicroStrategy's convertible bonds have also become the target of arbitrage transactions. These convertible bonds mainly consist of:

• Allianz Global Investors (25%)
• Voya Investment, Calamos Investment, State Street

These institutions adopted a hedging strategy of "buying convertible bonds and short MicroStrategy shares" to reduce risks and gain arbitrage opportunities. When MicroStrategy's stock price changes, the value of the convertible bond will also be affected:

• As the stock rises, the convertible bond increases in value, and the hedge fund further short the stock.
• When stocks fall, funds cover their short positions, slowing the price decline.

This mechanism explains why MicroStrategy's stock is highly volatile but still maintains some support, as the market's institutional trading patterns have become a major influence.

The Bitcoin market is entering an era dominated by hedge funds

Overall, the Bitcoin market has shifted from a stage dominated by retail investors to a new era controlled by hedge funds and institutional capital. The report reveals several important trends:

1. Bitcoin ETFs do not truly reflect the long-term investment needs of institutions, but are mainly driven by arbitrage trading.
2. Hedge funds are the main holders of Bitcoin ETFs, and their trading patterns affect market liquidity and volatility.
3. When arbitrage opportunities decrease, funds will withdraw from the market, potentially causing a price correction.
4. MicroStrategy is extremely overvalued, and its stock and convertible bond markets are also used as arbitrage tools by hedge funds.

The development direction of the Bitcoin market is changing, and future price trends will not only depend on the value of Bitcoin itself, but will be more influenced by institutional arbitrage strategies and macroeconomic policies. In this new game, market participants need to rethink their investment strategies to cope with this institutional-dominated capital game.