Spot Bitcoin ETF Inflows Aren’t What They Seem

Large inflows into spot bitcoin ETFs might not be what they seem. 

While the 11 U.S.-listed spot bitcoin ETFs on the market have collectively generated around $15 billion of inflows since Jan. 11, there’s been a simultaneous $7.5 billion increase in bitcoin futures open interest over the same time period, according to Mike Cagney, co-founder and CEO of Figure Markets.

According to Cagney, that suggests that a lot of the spot bitcoin ETF inflows are the result of the basis trade, where investors buy spot bitcoin while selling bitcoin futures to profit from the spread between the two prices.

As of this writing, front month bitcoin futures were trading at $60,900, a nearly 1% premium to the spot bitcoin price. The spread has been as high as 2% in recent weeks. 

Investors can profit from the basis trade if the spread between spot and bitcoin futures prices narrows.

The debut of spot bitcoin ETFs in the U.S. in January made it easier to implement the trade. Instead of buying spot bitcoin directly, investors could buy spot bitcoin ETFs to get the same exposure.

These basis-trade-fueled purchases don’t have the same bullish impact on bitcoin prices as purchases from unhedged buyers, and it’s why “ETF inflows haven't driven prices higher after [the] initial push up,” Cagney said.

Cagney noted that the potential unwinding of the basis trade, where traders buy bitcoin futures and sell spot bitcoin, shouldn’t have much of a price impact either. 

The basis trade phenomenon helps explain the disconnect between spot bitcoin ETF flows and price movements. It also underscores the fact that these products aren’t being used just by long-term bitcoin bulls. 

A host of market participants—from long-term investors to short-term traders and arbitrageurs—are using them to express their views. 

And particularly now, with arbitrageurs so prevalent in the market, it makes it harder to read into the inflows and outflows from these products.