Understanding why Bitcoin’s price isn’t rising with massive ETF inflows.
Despite the recent influx of capital into Bitcoin exchange-traded funds (ETFs), many are puzzled as to why Bitcoin’s price isn’t experiencing a significant increase. To understand this, we need to look at the underlying market dynamics and strategies being employed by traders.
Bitcoin Decline Since June 10:
Since June 10, Bitcoin has experienced a notable decline, dropping from approximately $72,000 to as low as $65,200. This drop coincides with significant activity in Bitcoin ETFs, which have seen outflows of around $580.6 million, according to Farside data.
Contrasting Previous Record-Setting Inflows:
This starkly contrasts the previous record-setting 19 consecutive trading days of inflows, totaling roughly $4 billion, which coincided with Bitcoin’s price increase from around $60,000 to $72,000 between May 13 and June 7. The recent outflows represent approximately 4.3% of the total inflows, aligning with a roughly 10% correction in Bitcoin’s price.
Price Discrepancy Raises Questions:
This discrepancy has raised questions about why Bitcoin’s price didn’t rise despite the substantial inflows. Basis trade strategy explained that one plausible explanation is the “basis trade,” a strategy used by hedge funds and investors. In this strategy, investors go long on the underlying spot ETF products and short the futures market, creating a net-neutral trade that protects them regardless of whether the price goes up or down.
Influence of Positive Funding Rates on Basis Trade Strategy
This approach is influenced by the current positive funding rates, which are around 6%, according to Coinglass. Traders are willing to incur higher costs to leverage long positions in Bitcoin, often using calendar futures on the (Chicago Mercantile Exchange) CME. These futures, trading at a premium to the spot price, can be rolled over through a process known as “rolling forward.”
The CME defines this as exiting an expiring futures contract while simultaneously entering a new one with a later expiration date, thus extending the position without interruption.
Focus on Price Spread for Profitability:
Investors focus on the spread between the spot price and the futures price, as this differential determines the profitability of the basis trade.
How Traders Control Bitcoin’s Price
Traders use a strategy called hedging and rolling forward to control Bitcoin’s price. They do this by betting that Bitcoin’s price will stay steady or go down in the future while already owning Bitcoin. This keeps Bitcoin’s price from going up too much.
With the rolling forward strategy, traders can keep their Bitcoin investments without having to sell them when their contracts end. As a result, Bitcoin’s price doesn’t go up as much, even when a lot of money is being put into Bitcoin. This helps explain why Bitcoin hasn’t reached new record highs after $4 billion was invested.
Conclusion
The observed stability in Bitcoin’s price, despite massive ETF inflows, can be attributed to sophisticated trading strategies like the basis trade and rolling forward. These strategies create a net-neutral trade environment and ensure continuous exposure to Bitcoin, ultimately reducing the price’s sensitivity to large inflows. Understanding these dynamics sheds light on why Bitcoin’s price hasn’t surged to new all-time highs despite substantial investment through ETFs.
Reference: CryptoSlate.
