Bitcoin's Long-Term Demand Questioned: ETF Inflows Driven by Short-Term Strategies

Bitcoin's demand as a long-term asset has been called into question, with recent analysis suggesting that it may be overstated, primarily driven by arbitrage strategies. This revelation comes amidst a complex landscape surrounding Bitcoin exchange-traded funds (ETFs), where institutional interest may not be as robust as portrayed by mainstream media.

Recent insights from 10x Research indicate that a substantial portion of the inflows into Bitcoin ETFs is driven by short-term trading strategies rather than long-term investment. Markus Thielen of 10x Research highlighted that the buying and selling of Bitcoin ETFs is primarily driven by funding rates, with many investors focusing on short-term arbitrage rather than long-term capital appreciation.

The recent surge of interest in spot Bitcoin ETFs in the United States, with net inflows reaching approximately $39 billion since their launch in January 2024, points towards a trend that underscores short-term trading strategies. A mere 44% of these inflows can be classified as genuine long-term investments, according to 10x Research’s Markus Thielen. This discrepancy raises crucial questions about the actual demand for Bitcoin as a long-term asset within multi-asset portfolios.

Thielen’s assertion that around 56% of inflows are tied to arbitrage strategies underscores the complexity of the current market dynamics for Bitcoin ETFs. Many market participants engage in the carry trade, where they purchase spot Bitcoin through ETFs while simultaneously shorting Bitcoin futures. This strategy enables traders to capitalize on price discrepancies between spot and futures markets. However, the effectiveness of this approach has recently diminished as funding rates have stabilized, leading hedge funds and trading firms to reduce their positions.

The market has experienced notable fluctuations, illustrated by four consecutive trading days marked by outflows totaling approximately $552 million from Bitcoin ETFs. Thielen pointed out that these outflows can adversely affect market sentiment, often misinterpreted as bearish signals in media reports. He emphasizes that this unwinding of positions is market-neutral, merely reflecting a shift in trading strategies rather than an outright sell-off of Bitcoin.

Despite current challenges, Thielen suggests a potential shift in dynamics, noting that genuine long-only Bitcoin buying has seen a rise post-US presidential election. This uptick, however, faces hurdles due to collapsing funding rates that reduce the attractiveness of arbitrage trading as a viable strategy. In the