Since July 5, Bitcoin has seen net inflows of $1.91 billion in its US spot exchange-traded funds (ETFs). Despite this, its price has struggled to stay above $65,000.
Meanwhile, the S&P 500 index reached an all-time high on July 16, and gold, considered the world’s largest reserve asset, traded at a historical high on July 17. This indicates that the factors hindering Bitcoin’s performance are not tied to the traditional finance markets. But what exactly is causing this underperformance?
Not every spot Bitcoin ETF buyer is betting on BTC price upside
To begin with, buyers of spot ETFs might have shifted away from spot positions, possibly for tax reasons or to use those shares as collateral for traditional finance trades. Additionally, major holders of these ETFs include hedge funds known for arbitrage trades, which aim to profit from market inefficiencies without betting on price movements. For example, the cash and carry trade involves selling Bitcoin futures while simultaneously buying the equivalent spot ETF position.
Hedge funds known for arbitrage trades include Millennium Management, Schonfeld Strategic Advisors, Jane Street, HBK Investments, Susquehanna International, and Bracebridge Capital. It’s not certain that these institutional investors are engaging in straightforward trades, such as fully hedged cash and carry positions. The key point is that these funds are not typical long-term holders, nor are they strong believers in Bitcoin’s value proposition.
The Chicago Mercantile Exchange (CME) Bitcoin futures open interest, which measures the total active contracts, currently stands at $10.2 billion, up 23% from the previous week, according to Coinglass data. For every buyer of a futures contract, there is an equivalent short seller, suggesting that many hedge funds are seeking gains from the BTC futures contracts premium, which is currently at an annualized rate of 11%.
These funds engaged in arbitrage trades will eventually have to cover their futures market short positions, but the market impact is neutralized by the sale of the spot BTC position. However, this does not rule out the possibility that other savvy institutional investors are betting against Bitcoin’s price. The increase in CME’s BTC futures open interest partially explains the limited impact of the spot ETFs net inflow.
Inflation drops in the US, but it might not help Bitcoin price
From a broader perspective, Bitcoin’s main appeal lies in its sovereignty and predictability, thanks to its hard monetary policy and independent network of nodes validating the shared ledger. This narrative is more compelling when central banks fail, either due to the collapsing purchasing power of their fiat currencies or a lack of trust in the government’s ability to repay its debt. However, US inflation is decreasing, and US Treasurys are strengthening, indicating that investors have confidence in the US Federal Reserve’s strategy.
The US Treasury 5-year yield fell to 4.07% on July 17 from 4.43% on July 1, indicating higher demand from buyers. Investors are accepting lower yields for these fixed-income assets because they are seen as extremely safe or in anticipation of lower inflation ahead. This trend is unfavorable for alternative stores of value like Bitcoin while promoting lower interest rates, which stimulate the economy and potentially boost the stock market.
As market confidence in the US economy grows, the narrative supporting Bitcoin as an independent means of exchange with a mathematically determined supply weakens. In the short term, positive macroeconomic data that shows no signs of stress negatively impacts Bitcoin’s price. This offsets the bullish sentiment from the spot ETF inflows.
