Bitcoin's Cash and Carry Collapse: Hedge Funds Exit, Driving Record Outflows

Bitcoin's recent price crash has been attributed to the erosion of a low-risk yield trade involving spot exchange-traded funds (ETFs) and CME futures, according to analyst Kyle Chassé. This trade, known as cash and carry, allowed hedge funds to earn up to 5.68% in annualized returns by buying spot Bitcoin ETFs and shorting Bitcoin futures on CME. However, with recent market weakness, the premium of Bitcoin futures over the cryptocurrency's spot price has collapsed, making the trade no longer profitable. As a result, hedge funds are exiting the market, leading to record outflows from US spot Bitcoin ETFs this week.

Chassé noted that hedge funds were not betting on Bitcoin's price increase but rather exploiting a low-risk yield opportunity. The same trade that kept Bitcoin stable on the way up is now accelerating the crash, as hedge funds are no longer interested in maintaining their positions. This development suggests that institutional adoption of crypto assets is not a one-way street and can be influenced by market conditions and trading strategies.

Despite the recent sell-off, onchain data reveals that the losses are mainly concentrated among Bitcoin tourists, or new traders who only entered the market recently. According to Glassnode, 74% of the realized losses came from holders who bought in the last month. However, unrealized losses from the recent sell-off exceeded crypto exchange FTX's capitulation event, indicating a strong sign of a bottom formation in Bitcoin's price. Analyst Milkybull Crypto highlighted that a drop of this magnitude is a clear indication that the market is oversold and may be due for a rebound.