US Bitcoin ETF Demand Driven More by Arbitrage than Long-Term Investment, Says 10x Research

Bitcoin exchange-traded funds (ETFs) have attracted substantial investor interest in the United States since their launch in January 2024, amassing approximately $39 billion in net inflows. However, a new report by 10x Research suggests that the true demand for Bitcoin as a long-term asset may be much smaller than the media has portrayed, with the majority of ETF investments driven by short-term arbitrage strategies rather than long-term holding.

According to Markus Thielen, head of research at 10x Research, only about 44% of the $39 billion in spot Bitcoin ETF inflows represents genuine long-term investment. The remaining 56% — roughly $21.5 billion — is largely tied to arbitrage strategies, including a practice known as the “carry trade.” In this strategy, traders buy spot Bitcoin through ETFs while simultaneously shorting Bitcoin futures to profit from the price difference between the two markets.

Thielen pointed out that this trend means the true demand for Bitcoin as a long-term investment in diversified portfolios is likely smaller than what many media reports suggest. He explained, "Rather than reflecting broad-based institutional adoption, the buying and selling of Bitcoin ETFs is primarily driven by funding rates (basis rate opportunities), with many investors focusing on short-term arbitrage rather than long-term capital appreciation."

The analysis also revealed that the largest holders of BlackRock's Bitcoin ETF, known as IBIT, are predominantly hedge funds and trading firms. These entities specialize in exploiting market inefficiencies and capturing yield spreads, rather than taking directional positions on Bitcoin’s price.

As funding rates and basis spreads have recently fallen to levels that no longer justify new arbitrage positions, Thielen noted that many of these hedge funds and trading firms have stopped adding fresh inflows to Bitcoin ETFs and have begun unwinding existing positions. This unwinding has been observed in the market over the past week, with a reported $552 million in outflows, according to Farside Investors.

Despite these outflows, Bitcoin's price has remained range-bound during the same period. Thielen emphasized that media reports often misinterpret these outflows as bearish signals, whereas the process of unwinding positions is actually market-neutral. This is because it involves selling ETFs while simultaneously buying Bitcoin futures, effectively offsetting any directional impact on the market.

The outflow trend has raised concerns about the overall market sentiment, but Thielen remains optimistic that the situation could change. He pointed out that real buying flows for Bitcoin ETFs have been picking up since the U.S. presidential election. While the growth of genuine long-term buying has increased since Donald Trump’s election, Thielen acknowledged that the decline in retail trading volumes and the collapse of funding rates have made the arbitrage strategy less attractive to trading firms, which has led to the recent unwinding of positions.

In mid-2024, Real Vision CEO Raoul Pal echoed similar sentiments, claiming that up to two-thirds of the net inflows into spot Bitcoin ETFs were likely driven by arbitrage trading. As funding rates continue to fluctuate, it remains to be seen whether long-term investment demand for Bitcoin will take hold or if short-term trading strategies will continue to dominate the market.

For now, 10x Research’s findings suggest that, while Bitcoin ETFs have attracted significant capital, much of the investment activity appears to be driven by traders seeking short-term gains rather than long-term holders seeking exposure to the cryptocurrency as a store of value.