Summary:
Arthur Hayes warns Bitcoin could drop to $70K due to hedge fund ETF unwinding.
Large outflows from spot BTC ETFs are already being observed, totaling $517 million.
Hedge funds are engaging in a basis trade, creating pressure on Bitcoin's price.
Recent market fluctuations saw Bitcoin dip over 5%, hitting an intraday low of $91,000.
Bitcoin's Potential Drop to $70K
According to Arthur Hayes, co-founder of BitMEX, Bitcoin may face a significant downturn, potentially dropping to $70,000. This prediction hinges on the behavior of large hedge funds unwinding their positions in US Bitcoin exchange-traded funds (ETFs).
Hayes made these remarks on February 24, suggesting that massive outflows could occur from popular BTC ETFs, including the BlackRock iShares Bitcoin Trust (IBIT).
The Hedge Fund Strategy
Many IBIT holders are hedge funds that have adopted a strategy of going long on ETFs while shorting CME futures. This approach aims to generate a low-risk yield that exceeds that of short-term US Treasurys. However, if the yield, known as the basis spread, decreases as Bitcoin's price falls, these funds may react by selling their IBIT shares to buy back CME futures.
Hayes noted that these funds, currently in profit, are likely to unwind their positions during US trading hours to realize gains, which could drive Bitcoin's price back down to $70,000.
ETF Demand and Basis Trade Dynamics
In a recent investor note on February 23, Markus Thielen from 10x Research indicated that a significant portion of Bitcoin ETF demand stems from hedge funds engaged in this arbitrage strategy rather than long-term investors. This basis trade attempts to take advantage of the price discrepancy between Bitcoin as tracked by ETFs and Bitcoin futures prices on the CME.
If Bitcoin's price declines, it can also affect the futures premium, prompting hedge funds to unwind their trades by selling ETF shares and purchasing short CME futures. This coordinated selling can lead to increased pressure on Bitcoin's price, potentially creating a feedback loop that drives more funds to exit their positions.
Recent Market Movements
Recently, Bitcoin saw a drop of over 5%, reaching an intraday low of $91,000 before a slight recovery on February 25.
ETF Outflows on the Rise
Outflows from spot ETFs in the US have been on the rise. On February 24, the day recorded the largest outflow from eleven spot BTC ETFs in seven weeks, totaling $517 million. This marked the fifth consecutive trading day of outflows. Notably, the BlackRock fund experienced an outflow of $159 million, while Fidelity's Wise Origin Bitcoin Fund lost $247 million. Other funds such as Bitwise, Invesco, VanEck, WisdomTree, and Grayscale also reported significant outflows.
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