Since July 5, Bitcoin (BTC) has seen $1.91 billion in net inflows from U.S. spot exchange-traded funds (ETFs), but the price has struggled to hold above $65,000.
Meanwhile, the S&P 500 hit a record high on July 16, and gold, considered the world’s largest reserve asset, hit a record high on July 17. This suggests that the factors hindering Bitcoin’s performance are not related to traditional financial markets. But what exactly is causing this underperformance?
Not all Bitcoin ETF buyers are betting on a rise in the BTC price.
First, spot ETF buyers may have moved out of their spot positions for tax reasons or to use the stock as collateral for traditional financial transactions. Also, major holders of these ETFs include hedge funds, known as arbitrageurs, who aim to profit from market inefficiencies without betting on price movements. For example, a cash and carry trade involves selling Bitcoin futures while simultaneously buying the same spot ETF position.
Hedge funds known for arbitrage trading include Millennium Management, Schonfeld Strategic Advisors, Jane Street, HBK Investments, Susquehanna International, and Bracebridge Capital. It is unclear whether these institutional investors are engaging in simple trades such as fully hedged cash and carry positions. The point is that these funds are not typical long-term holders and do not strongly believe in the value proposition of Bitcoin.
According to Coinglass data, the Chicago Mercantile Exchange (CME) Bitcoin futures open interest, which measures total active contracts, is now $10.2 billion, up 23% from the previous week. There is one short seller for every futures contract buyer, suggesting that many hedge funds are looking to profit from the BTC futures contract premium, which is currently 11% per year.
Funds that engage in such arbitrage will eventually have to cover their short positions in the futures market, but by selling their spot BTC positions, the market impact is neutralized. However, this does not rule out the possibility that other smart institutional investors may bet on the price of Bitcoin. The increase in open interest in BTC futures on the CME partially explains the limited impact of net spot ETF inflows.
Related: Bitcoin Sales Earn German Government $2.8 Billion
Falling US Inflation May Not Help Bitcoin Prices
In a broader sense, Bitcoin’s primary appeal lies in its sovereignty and predictability, thanks to its strong monetary policy and a network of independent nodes that validate the shared ledger. This narrative is even more compelling when central banks fail because the purchasing power of fiat currencies collapses or there is a lack of confidence in the government’s ability to repay its debt. However, US inflation is declining and the US Treasury is strengthening, showing that investors have confidence in the US Federal Reserve’s strategy.
The US Treasury 5-year yield fell from 4.43% on July 1 to 4.07% on July 17, indicating increased demand from buyers. Investors are accepting lower yields on these fixed income assets because they are perceived as very safe or because inflation is expected to be low in the future. While this trend is unfavorable for alternative stores of value like Bitcoin, it promotes lower interest rates, which can stimulate the economy and potentially boost stock markets.
As market confidence in the U.S. economy grows, the narrative supporting Bitcoin as an independent medium of exchange with a mathematically determined supply is weakening. In the short term, positive macroeconomic data without signs of stress are negatively impacting Bitcoin prices. This is counteracting the bullish sentiment from spot ETF inflows.
This article does not contain any investment advice or recommendations. All investment and trading moves involve risk, and readers should conduct their own research when making decisions.