Bitcoin plummets, has the hedge fund's "arbitrage game" crashed?

In the past week, 39,546,659,908 fell from $99,000 to below $80,000, almost returning to the price level before the U.S. elections. Some say it was the hedge funds' arbitrage strategies that collapsed, dragging down the market.

What is arbitrage?

In the past few months, hedge funds have relied on a "sure-win" tactic to make money:

Buying Bitcoin spot ETFs (BlackRock, Fidelity) on one hand,

and shorting Bitcoin futures on the CME on the other,

earning the price difference between the two, with an annualized return of over 5%, and with some leverage, it could reach double digits.

This tactic had almost no risk, and the funds were having a great time.

So why has it suddenly failed?

This arbitrage relies on futures being more expensive than spot (premium). But recently, the market has been struggling, the premium has shrunk, and trading has become unprofitable. As a result, the funds stopped participating and withdrew large amounts; Bitcoin was sold off heavily, and the price couldn't hold.

It's quite alarming; within a week, $1.9 billion flowed out of ETFs, and CME futures contract volumes also plunged, with Bitcoin dropping over 10% in just a few days. It was stable when prices were rising, but crashed quickly when they fell. Hedge funds are not concerned about whether Bitcoin goes up or down; they only want to profit from the price difference. Now that there’s nothing to gain, they withdraw their investments, and the market is left hanging.

What will happen next?

Arbitrage is still being liquidated, and the selling pressure continues.

Bitcoin needs real buyers to support it (not just funds looking to arbitrage).

Leverage liquidations haven't stopped, and volatility will be high.

ETFs were originally a good thing, attracting long-term players, but they also drew short-term arbitrage funds. Now that arbitrage can’t be played anymore, ETF outflows have exacerbated the decline. Once the fund liquidations are over, the downward trend may ease. Some demand within the ETF is fake; until real buyers come in, the market will continue to fluctuate. The hedge fund arbitrage collapse is quite severe, but it will also have to endure this painful period. Excessive selling will eventually stop, and the next opportunity will arise; for now, don’t panic, holding on is key.

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