Bitcoin's Scarcity: Flow Analysis of ETFs, Treasuries, and Derivatives

The viral claim that Bitcoin's 21 million cap is "theoretically infinite" due to derivatives is being pushed back by the industry's own executives. They argue that financial products like ETFs and futures affect price dynamics but do not change the fixed supply. As Harriet Browning of Twinstake stated, institutions using these tools are not "minting new Bitcoin." The debate centers on whether this paper market dilutes scarcity.

Institutional adoption is the real story, backed by concrete flow data. In 2025, spot Bitcoin ETFs and corporate treasuries absorbed 1.2 times the growth in active supply. This structural shift is now measurable: corporate treasuries hold 5.7% of total Bitcoin supply. That is a direct, permanent reduction in the circulating float available for speculation.

The bottom line is that this institutional ownership is a floor, not a ceiling. These assets are being held by long-term allocators, not speculative traders. The flow data shows a clear transfer of Bitcoin from volatile retail hands into stable, strategic reserves, reinforcing its scarcity in practice, even as the paper market expands.

Derivatives Flows: The New Price Engine

The recent ~50% price correction from October 2025 to February 2026 is a classic leveraged unwind, not a scarcity event. The move was driven by a rapid reduction in derivatives exposure, with Bitcoin futures open interest falling from over $90 billion at its peak to about $49 billion in just weeks. This deleveraging was orderly, with price declines roughly mirroring the drop in notional leverage, avoiding a chaotic liquidation cascade.

Volatility metrics confirm extreme risk-off positioning ahead of the sell-off. In early February, the 25-delta put implied volatility spiked to 95%, the highest level since 2022. The 25-delta risk reversal plunged to -19.34, its most negative reading in over three years, showing traders paid a premium for downside protection. This signals a market braced for further losses, with options flows reflecting a migration toward liquidity during stress.

The transmission mechanism is direct: crypto-native perpetual futures can spill over into the spot market via funding-rate arbitrage. When funding rates turn negative, perpetual traders are incentivized to sell spot Bitcoin to buy cheaper perpetuals, amplifying downward moves. This creates a feedback loop where derivatives flows drive spot price action, making the paper market a primary engine for volatility independent of the fixed 21 million supply.

Catalysts and What to Watch

The path forward hinges on the pace of leverage recovery and positioning shifts. The recent ~50% price drop was a leveraged unwind, and the market's next major move will be dictated by whether that deleveraging is complete or if new risk builds.

First, monitor the pace of futures open interest recovery. The market shed over 45% of its peak leverage, with open interest falling from above $90 billion to about $49 billion. A sustained rebound in this metric would signal a return of bullish positioning and potential upside pressure. Conversely, if open interest remains depressed, it suggests the market is still in a de-risking phase, capping rallies.

Second, watch for a shift in the 25-delta risk reversal. This measure of implied volatility skew fell to -19.34 in early February, its most negative level in over three years, showing traders paid a premium for downside protection. A move toward positive values would indicate a return of bullish sentiment and a willingness to pay for upside exposure, a key signal for a sustained recovery.

The primary risk remains a new wave of deleveraging. The market is vulnerable if price breaks key support. A move below the $60,000 level, a historical support from 2021, could trigger another round of liquidations and accelerate the decline toward $52,500. The recent "slow bleed" price action and elevated liquidation flows highlight that the threat of forced selling is not gone.