Bitcoin plunges, is hedge fund arbitrage trading to blame?

Compiled by: 0xjs@Golden Finance

In one week, the price of Bitcoin fell from $99,000 to below $80,000, almost falling back to the price of Bitcoin before the US election. Crypto analyst Kyle Chassé believes that one of the main reasons for the recent sharp drop in BTC prices is that hedge fund arbitrage trading is gradually fading.

Here's how this arbitrage trade works - and why the collapse of arbitrage trades will bring shock waves to the market.

1. For several months, hedge funds have been using BTC spot ETFs and CME futures for low-risk returns. Here's how it works:

• Buy Bitcoin spot ETFs (BlackRock, Fidelity)

• Short BTC futures on CME,

• Earn the difference with an annualized return of about 5.68%, and some even use leverage to increase the return rate to double digits.

But now? This arbitrage trade is collapsing.

2. The trade relied on BTC futures trading at a premium over spot. But with recent market weakness, the premium has fallen sharply. What is the result?

• The trade is no longer profitable.

• Funds are exiting en masse.

• BTC selling pressure has soared.

3. Look at the brutal ETF outflows:

• Over $1.9 billion of BTC sold in the past week

• CME open interest plummeted as funds liquidated

• BTC fell by double digits in a few days, and the same carry trade that held steady during Bitcoin's rise is now accelerating the collapse.

4. Why is this happening?

Because hedge funds don't care about Bitcoin. They're not betting on Bitcoin's surge. They're just taking low-risk returns.

Now that the trade is closed, they're withdrawing liquidity - letting the market free fall.

5. What happens next?  

• Cash and arbitrage will continue to unwind.  

• BTC needs to find real organic buyers (not just hedge funds extracting returns).

•  Volatility will remain high as leveraged positions continue to be liquidated.

6. This is a classic case of liquidity play.

ETFs not only brought in long term holders, but also hedge funds doing short term arbitrage. Now we are seeing the consequences.

7. Big takeaway?  

• We don’t know if the pain is over, but it will likely be once these trades are fully unwound.

• ETF “demand” is real, but some of it is purely for arbitrage. Demand to hold BTC is real, just not as much as we think.

•  Until real buyers step in, this volatility and turmoil will continue.

8. Final Thoughts:

• The unwinding of cash and arbitrage has been brutal — but necessary.

• ETF outflows = more forced selling, but this shock will eventually set the stage for the next round.

• Survive now, accumulate later.

• Pain creates opportunity. Just don't get liquidated.