According to Raoul Pal, CEO of Real Vision, a significant portion of inflows into spot Bitcoin exchange-traded funds (ETFs) is driven by arbitrage trading rather than retail investors. Pal’s claims, based on data presented by crypto analyst and MV Capital partner Tom Dunleavy, suggest that around two-thirds of the net inflows into spot Bitcoin ETFs may come from arbitrage trading hedge funds.
Arbitrage Trading and ETF Inflows
In a June 11 post on X, Pal stated, “If this is correct, it shows the vast majority of the ETF flow are just arbitrageurs and retail is not the key driver yet.” The data showed that the “top 80 holders” of U.S.-based spot Bitcoin ETFs were predominantly hedge funds, with capital sourced from various institutional and individual investors.
Key Data Points:
- The 80 firms collectively hold approximately $10.26 billion worth of spot Bitcoin ETF shares.
- This represents roughly two-thirds of the $15.42 billion in net inflows since the launch of spot Bitcoin ETFs on January 11.
- Millennium Management, an international hedge fund, holds the largest amount at $1.94 billion in Bitcoin ETF shares, spread across multiple issuers including Bitwise, Grayscale, Fidelity, BlackRock, and ARK and 21Shares’ ETFs.
Contrasting Views
Not everyone agrees with Pal’s analysis. Some critics argue that, excluding the Grayscale Bitcoin Trust (GBTC), the 10 U.S. Bitcoin ETFs have $42 billion in assets under management, with short interest on the CME.
Crypto trader Joseph B. commented, “The recent inflows could certainly be attributed to the basis trade, but as an overall number, the basis trade makes up less than 15% of overall ETF flows.”
Pal countered, claiming he knew these firms’ flows are primarily arbitrage since “what the main hedge funds listed do mainly. They are not really directional risk takers.”
Understanding Arbitrage Trading
Arbitrage trading involves exploiting short-term discrepancies between the net asset value of the spot Bitcoin ETF and the price of Bitcoin, the underlying asset. This trading strategy is typically employed by hedge funds seeking to capitalize on price inefficiencies rather than holding assets for long-term appreciation.
Deep Q Digital CEO Carlos Zendejas noted, “When you read through this list the one thing that jumps off the page is that most of these guys are not ‘Buy and Hold’ investors.”
The debate over the primary drivers of ETF inflows highlights the complexity of the cryptocurrency market and the various strategies employed by institutional investors. While arbitrage trading appears to play a significant role, the full picture of ETF flows likely involves a mix of strategies and investor types. As the market evolves, the influence of retail investors and long-term holders may become more pronounced.
