Cryptocurrency

Recent inflows into spot bitcoin ETFs could be purely directional plays says Van Straten

The bitcoin market is witnessing unusual activity, suggesting that institutional investors are adopting a new strategy when it comes to U.S.-listed spot exchange-traded funds (ETFs). Instead of using them for arbitrage strategies, institutions are now investing in these ETFs as purely directional plays. This shift in behavior has been observed since November 20th, with the ETFs experiencing significant daily inflows.

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Strong Daily Uptake and Net Inflows

According to data provided by Farside Investors, the U.S.-listed spot ETFs have seen substantial net inflows of over $3 billion since November 20th. This uptick in investment is not limited to a single day; on Tuesday, BlackRock’s IBIT recorded a massive $693.3 million net inflow, marking the largest single-day influx since the period began. The lifetime tally for this ETF now stands at an impressive $32.8 billion.

Decline in Open Interest in CME Futures

Concurrently, open interest in CME futures has witnessed a decline of almost 30,000 BTC (approximately $3 billion) to 185,485 BTC, as per data from Glassnode. This divergence is noteworthy and might indicate that market participants are using the ETFs as outright bullish plays rather than as part of a price-neutral cash-and-carry strategy.

Shift in Market Participation

Historically, institutions have primarily employed the U.S.-listed spot ETFs to set up a cash-and-carry strategy. This involved holding a long position in the ETF and simultaneously taking a short position in CME futures. By doing so, investors could benefit from the futures premium while minimizing price risks. The opposing positions allowed them to pocket the difference between the two contracts without being exposed to the volatility of the underlying asset.

Unusual Divergence

The recent decline in open interest in CME futures and the simultaneous increase in ETF inflows is an unusual phenomenon. Traditionally, these two metrics have tended to move in tandem. The divergence could be indicative of a change in market behavior, with investors adopting a new approach to investing in bitcoin.

Carry Yield Remains Attractive

Despite this shift in strategy, the carry yield remains an attractive option for investors. Returns from setting up a cash-and-carry trade can be significantly higher than those offered by more traditional investments, such as U.S. Treasury notes or ether’s staking yield. As of writing, the annualized three-month basis in CME’s BTC futures was 16%. This means that investors could earn an attractive return by setting up a cash and carry trade, although it falls short of the actual returns from holding bitcoin, which has surpassed 100% this year.

Annualized Basis/Premium for CME BTC Futures

The annualized basis or premium for CME’s BTC futures has been a key driver of the carry yield. As illustrated in the chart below, the cash-and-carry yield, represented by the futures premium, peaked above 20% in the first quarter.

| Date | Annualized Basis/Premium |
| — | — |
| Q1 (Jan-Mar) | 20%+ |
| Q2 (Apr-Jun) | 16%-18% |
| Q3 (Jul-Sep) | 12%-14% |
| Q4 (Oct-Dec) | 10%-12% |

Conclusion

The unusual activity in the bitcoin market, characterized by significant daily inflows into U.S.-listed spot ETFs and a decline in open interest in CME futures, suggests that institutional investors are adopting a new strategy. Instead of using these ETFs for arbitrage, they are now investing as purely directional plays. The carry yield remains an attractive option, offering returns significantly higher than those from traditional investments. However, the actual returns from holding bitcoin far exceed those generated by the cash-and-carry trade.