Bitcoin’s price has been on a decline since June 10, dropping from $72,000 to as low as $65,200. This drop has coincided with significant outflows from Bitcoin exchange-traded funds (ETFs), totaling around $580.6 million. In contrast, there were 19 consecutive days of inflows totaling $4 billion between May 13 and June 7, which pushed the price from $60,000 to $72,000.
The recent outflows have raised questions about why Bitcoin’s price did not rise despite the substantial inflows. One possible explanation is the “basis trade” strategy used by hedge funds and investors. This strategy involves going long on the underlying spot ETF products and shorting the futures market to create a net-neutral trade that hedges against price movements.
Investors focus on the spread between the spot price and the futures price to determine the profitability of the basis trade. The positive funding rates, currently around 6%, make it attractive for traders to leverage long positions in Bitcoin using calendar futures on the CME. These futures trade at a premium to the spot price and can be rolled over through a process called “rolling forward.”
By shorting the futures market while being long on the spot market, traders can hedge against price movements and suppress Bitcoin’s price. This strategy allows them to maintain exposure to Bitcoin without closing their positions at contract expiration, making the price less sensitive to inflows. As a result, Bitcoin has not reached new all-time highs despite the significant $4 billion influx.
Overall, understanding the basis trade dynamics is crucial in analyzing Bitcoin’s price movements and why it may not always react as expected to inflows and outflows from ETFs. Traders and investors need to consider these factors when making decisions in the volatile cryptocurrency market.
