Is Hedge Fund Arbitrage Trading the Culprit for Bitcoin's Plunge?

In one week, the price of Bitcoin fell from $99,000 to below $80,000, almost falling back to the price of Bitcoin before the US election. Crypto analyst Kyle Chassé believes that one of the main reasons for the recent sharp drop in BTC prices is that hedge funds' arbitrage transactions are gradually fading.

Here's how the carry trade works—and why its collapse would send shockwaves through markets.

1. For several months, hedge funds have been using BTC spot ETFs and CME futures to trade low-risk returns. Here’s how it works:

• Buy Bitcoin Spot ETFs (BlackRock, Fidelity)

• Short BTC futures on CME,

• Earn the difference with an annualized return of approximately 5.68%, and some even use leverage to increase returns to double digits.

But now? That carry trade is collapsing.

2. The deal relied on BTC futures trading at a premium over spot. But with recent market weakness, the premium has fallen sharply. What is the result?

• The trade is no longer profitable.

• Funds are exiting en masse.

• BTC selling pressure surges.

3. Look at the brutal ETF outflows:

• Over $1.9 billion worth of BTC was sold in the past week.

• CME open interest plummets as funds close positions

• BTC is down double digits in a matter of days, and the same carry trade that has held steady during Bitcoin’s rise is now accelerating the crash.

4. Why does this happen?

Because hedge funds don’t care about Bitcoin. They’re not betting on Bitcoin skyrocketing. They’re just taking low-risk returns.

Now that trading is closed, they are withdrawing liquidity – sending the market into free fall.

5. What happens next?

• Cash and carry positions will continue to be liquidated.

• BTC needs to find real organic buyers (not just hedge funds extracting yield).

• Volatility will remain high as leveraged positions continue to be liquidated.

6. This is a typical case of liquidity game.

ETFs not only brought in long-term holders, but also hedge funds that were looking to take short-term arbitrage profits. Now we are seeing the consequences.

7. What are the important conclusions?

• We don’t know if the pain is over yet, but it will likely be once these trades are fully unwound.

• ETF "demand" is real, but some of it is purely for arbitrage. The demand to hold BTC is real, just not as much as we think.

• Until real buyers step in, this volatility and turbulence will continue.

8. Final thoughts:

• The unwinding of cash and carry positions was brutal—but necessary.

• ETF outflows = more forced selling, but this shock will eventually set the stage for the next round.

• Survive now, accumulate later.

• Pain creates opportunity. Just don't get liquidated.