Explaining Bitcoin's Dull Price Action Amid Record ETF Inflows

ETF Inflows appear to be a part of non-direction cash and carry strategy and do not necessarily represent outright bullish bets.
Stablecoin inflows have slowed as well.

Crypto market observers are in flux as bitcoin's spot price continues to coil in a narrow range despite record inflows into the U.S.-listed spot exchange-traded funds (ETFs).

That starkly contrasts with the first quarter when prices surged as ETFs drew in billions. Back then, most traders likely placed bullish directional bets through ETFs.

That may not be the case anymore.

"It’s entities buying ETF and selling [CME] futures to roll down basis some primes are letting entities net that This is also why ETF inflows are high, but the spot is relatively unch[anged]," pseudonymous market observer CMS Holdings said on X.

The bi-legged strategy, popularly known as cash and carry arbitrage, aims to profit from the premium in the futures market relative to the spot market.

Traders seem to be shorting bitcoin futures on the regulated Chicago Mercantile Exchange (CME) while taking long positions in ETFs. As of last week, hedge funds and commodity trading advisers, categorized by the Commodities Futures Trading Commission, held record net short position of 18,175 contracts, according to data source QuickStrike.

A similar conclusion can be drawn from the fact that open interest, or the dollar value dedicated to active CME bitcoin futures contracts sized at 5 BTC, has grown in tandem with the cumulative ETF inflows.

In other words, record shorts aren't necessarily outright bearish bets and ETF inflows don't necessarily represent outright bullish bets. Both constitute a non-directional strategy, leaving the cryptocurrency's price directionless.

Open interest in CME futures has moved in lockstep with the ETF inflows. (BitMEX Research) (BitMEX Research)

Per BitMEX Research, large bitcoin ETF holders like Millennium and Schonfeld are likely involved in the cash and carry arbitrage (the basis trade).

"We agree with @cmsholdings that the CME commitment of traders reported increase in short positions in the hedge fund category is related to the basis trade. A key driver for this is that prime brokers are probably more willing to allow usage of the Bitcoin ETFs as collateral," BitMEX Research said on X.

Meanwhile, inflows through dollar-pegged stablecoins, the other prominent source of bullish pressures in the first quarter, have also slowed, arresting bitcoin's price rally.

"Currently, near the top of its range, bitcoin faces a challenge in breaking above new all-time highs. This can be attributed to the Bitcoin halving on April 20. Following this event, the minting of stablecoins notably slowed down, and wallets holding $>10m in stablecoins declined. This trend is currently impeding Bitcoin from surpassing its all-time highs," Markus Thielen, founder of 10x Research, said in a note to clients Monday.

Edited by Oliver Knight.

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