Bitcoin big dump Hedging fund arbitrage trading is the culprit?

Compiled by: 0xjs@Golden Finance

In a week, the price of Bitcoin fell from $99,000 to below $80,000, almost dropping back to the price level before the U.S. election. Crypto analyst Kyle Chassé believes that a major reason for the recent sharp decline in BTC prices is that the arbitrage trading by hedge funds is gradually fading.

This explains how this arbitrage trade works—and why the collapse of arbitrage trading can create shockwaves in the market.

1. For several months, hedge funds have been utilizing BTC spot ETFs and CME futures to engage in low-risk yield trading. The operation works as follows:

• Purchase Bitcoin Spot ETF (BlackRock, Fidelity)
• Short BTC futures on CME,
• Earn a spread with an annualized return rate of about 5.68%, with some even using leverage to increase the return rate to double digits.

But what about now? This arbitrage trade is collapsing.

2、This transaction relies on the BTC futures trading premium being higher than the spot. However, with the recent market weakness, the premium has significantly dropped. What will be the outcome?

• This transaction is no longer profitable.
• Funds are exiting on a large scale.
• BTC selling pressure surges.

3. Look at the brutal ETF outflows:

• In the past week, BTC sold for over $1.9 billion,
• With the fund closing positions, CME open interest plummeted,
• BTC has dropped double digits in a few days, while the same arbitrage trades remained stable during the rise of Bitcoin, and are now accelerating the collapse.

4. Why does this happen?

Because hedge funds don't care about Bitcoin. They are not betting on a Bitcoin surge. They are just seeking low-risk returns.

The trading has now ended, and they are withdrawing liquidity—allowing the market to free fall.

5. What will happen next?

• Cash and arbitrage will continue to close positions.
• BTC needs to find real organic buyers (not just hedge funds extracting profits).
• As leveraged positions continue to be liquidated, volatility will remain high.

6. This is a typical case of a liquidity game.

ETFs have not only attracted long-term holders but also hedge funds engaging in short-term arbitrage. Now we are seeing the consequences.

7. Important conclusion?

• We do not know if the pain has ended, but once these trades are fully closed, the pain is likely to end.
• The "demand" for ETFs is real, but some of it is purely for arbitrage. The demand for holding BTC is real, but not as much as we imagine.
• This volatility and turmoil will continue until real buyers get involved.

8. Final thoughts:

• The closing of cash and arbitrage is brutal - but it is also necessary.
• ETF fund outflows = more forced selling, but this shock will ultimately prepare for the next round.
• Survive now, accumulate later.
• Pain creates opportunities. Just don't get liquidated.