Bitcoin ETFs: Arbitrage Drives Inflows, Long-Term Buying Lags

Bitcoin ETF inflows, initially hailed as a sign of institutional adoption, are primarily driven by arbitrage strategies rather than long-term investments, according to 10x Research head of research Markus Thielen. Since their launch in January 2024, U.S. spot Bitcoin ETFs have accumulated around $39 billion in net inflows. However, Thielen estimates that only $17.5 billion—around 44%—is tied to genuine long-term buying. The remaining 56% appears to be linked to arbitrage strategies, particularly the “carry trade.”

This strategy involves buying spot Bitcoin through ETFs while simultaneously shorting Bitcoin futures contracts, allowing traders to profit from the price difference between spot and futures markets. As a result, much of the activity in Bitcoin ETFs is being driven by funding rate opportunities rather than traditional institutional adoption, Thielen explained.

Thielen further noted that hedge funds and trading firms are the largest holders of BlackRock’s IBIT ETF, with these entities focusing on exploiting market inefficiencies rather than taking outright directional exposure to Bitcoin. As funding rates and basis spreads have declined, arbitrage opportunities have become less profitable, prompting firms to scale back their ETF positions. This shift has already begun impacting ETF flows, with four consecutive trading days of net outflows last week, amounting to $552 million, according to Farside Investors.

While some observers might interpret these outflows as bearish for Bitcoin, Thielen argues that the impact is market-neutral since arbitrage unwinding involves selling ETFs while simultaneously buying Bitcoin futures—effectively canceling out any direct market effect.

Although arbitrage activity has been a major driver of Bitcoin ETF demand, there are indications that real buying interest is increasing, Thielen noted. Since the U.S. presidential election, long-only Bitcoin purchases have picked up, suggesting that some investors are now viewing Bitcoin as a long-term asset rather than just a trading instrument. However, this shift comes as retail trading volumes decline, which has further driven funding rates lower, reducing the attractiveness of arbitrage-based ETF strategies. If this trend continues, hedge funds and trading firms could further reduce their Bitcoin ETF exposure, potentially impacting overall inflows in the months ahead.