Institutional Top of Mind #26

Welcome to our Institutional Top of Mind with 10x Research, with our Macro Shifts series examining the forces reshaping the crypto landscape in 2025. Each analysis offers institutional investors a data-driven perspective on the regulatory environment, political influences, market infrastructure development, and macroeconomic drivers that matter most. Join us as we analyze these macro shifts through an institutional lens, providing deeper insights for sophisticated market participants navigating this rapidly evolving space.

In our fourth installment, we examine Bitcoin's recent market downturn through the lens of complex market dynamics, including the unwinding of hedge fund arbitrage positions, shifting ETF flows, and fading speculative momentum post-Trump rally. Our analysis reveals how elevated funding rates and basis spreads led to significant arbitrage activity, while cooling volatility has stalled key market drivers like MicroStrategy's accumulation strategy, culminating in a technical breakdown below critical support levels.

Bitcoin's Liquidity Squeeze: Arbitrage Unwind, ETF Selling, and Key Breakdown

TLDR:

• Hedge Fund Unwinding & Arbitrage—Elevated funding rates (24%) and basis spreads (16%) led to arbitrage trades in which hedge funds shorted Bitcoin futures and bought ETFs. As speculation faded, these trades unwound, driving ETF outflows and shifting market sentiment.

• Market Shift Post-Trump & Fed Pivot – Bitcoin’s rally accelerated post-Trump’s election but lost momentum after the Fed turned hawkish in December. Trump’s inauguration lacked bullish catalysts (e.g., Bitcoin Strategic Reserve). $TRUMP Coin hype faded, dragging volumes and funding rates lower.

• MicroStrategy’s Volatility Engine Stalling – As market volatility declined, MicroStrategy lost its ability to issue shares or debt at high premiums to fund Bitcoin purchases. This removed a key driver of Bitcoin demand, further pressuring the market.

• Technical Breakdown & Liquidations – With hedge funds exiting and MicroStrategy sidelined, Bitcoin broke key support levels ($95K, $92.8K), triggering stop-loss liquidations and accelerating a broader market correction toward potential lower targets.

Just before the December U.S. employment report, speculation in crypto perpetual futures surged, driving Bitcoin’s annualized funding rate to 24%. At the same time, the basis trade—which measures the spread between CME Bitcoin futures and the spot price—spiked to 16%.

While these elevated funding and basis rates are typically short-lived, they create opportunities for arbitrage-focused hedge funds and traders to exploit market inefficiencies. These traders often short overpriced Bitcoin futures while simultaneously buying spot Bitcoin, increasingly through Bitcoin ETFs.

Exhibit 1: Bitcoin (LHS) vs. Funding and Basis Rate (RHS)

The financial media tends to focus only on Bitcoin ETF inflows, portraying them as a bullish signal without considering the arbitrage-driven nature behind a significant portion of these trades.

When futures speculation subsides, funding and basis rates decline, making these arbitrage positions less attractive. Once the profit opportunity disappears, hedge funds and traders unwind their trades—buying back Bitcoin futures while selling Bitcoin ETFs. The media then picks up on this ETF selling, influencing market sentiment through a signaling effect and often shifting the broader narrative around Bitcoin’s price action.

Following the Fed’s 50 basis point emergency rate cut in September, crypto speculation surged, gaining further momentum after Donald Trump was elected president of the United States. However, by mid-December, the Fed shifted to a more hawkish stance. Trump’s post-inauguration remarks failed to deliver additional bullish catalysts, such as the announcement of a Bitcoin Strategic Reserve.

Initially hailed as a bold move, the Solana-based launch of the $TRUMP Coin sparked a wave of euphoria, driving a surge in trading activity. However, the meme coin’s sharp decline and a massive Solana token unlock in early March quickly eroded sentiment. A momentum faded.

As a result, trading volumes began to decline, leading to a drop in funding and basis rates. This shift was followed by significant Bitcoin ETF selling, signaling a broader market unwinding.

13F filings, which disclose the holdings of investment firms managing over $100 million in U.S.-listed stocks, reveal that a significant portion of the top 10 holders of BlackRock and Fidelity Bitcoin ETFs are hedge funds and prime brokers servicing hedge funds focused on arbitrage trading, rather than taking directional bets on Bitcoin.

These hedge funds hold at least $10 billion in Bitcoin ETFs. With total ETF inflows reaching $39 billion, at least 25% of Bitcoin ETF capital is tied to arbitrage-driven strategies. Our calculations suggest that 55% or more of total ETF inflows likely come from arbitrage-focused hedge funds rather than long-term investors betting on Bitcoin’s upside potential.

Since the launch of Bitcoin ETFs, open interest in CME-listed Bitcoin futures surged by $17 billion leading up to the December FOMC meeting. Since CME futures are Wall Street-native products rather than crypto-native, much of this increase was likely driven by arbitrage-seeking hedge funds.

Exhibit 2: Bitcoin ETF Flows ($ millions)

However, since December, $9 billion in CME Bitcoin futures positions have been unwound. Meanwhile, Bitcoin ETFs saw $2.8 billion in outflows in February. Yet, they maintain a net inflow of $800 million since the December FOMC meeting—supported mainly by MicroStrategy’s $6 billion in Bitcoin purchases.

As MicroStrategy repackages Bitcoin volatility and sells it to Wall Street, its ability to capitalize on this strategy diminishes when speculative momentum cools and volatility collapses. When this happens, MicroStrategy can no longer sell excess volatility to fund Bitcoin purchases, removing a key driver of its accumulation strategy.

This represents another critical engine of Bitcoin’s market dynamics losing altitude—alongside the decline in funding rates and overall volatility. As volatility around MicroStrategy shares decreases, so does its premium above net asset value (NAV), which previously allowed the company to issue shares at inflated valuations relative to its actual Bitcoin holdings. Additionally, the high volatility premium once enabled MicroStrategy to issue convertible debt at favorable terms, which becomes far less effective as volatility fades.

As arbitrage-seeking hedge funds unwind their positions, mainly through Bitcoin ETFs, and MicroStrategy can no longer drive the market with aggressive Bitcoin purchases, technical dynamics are now playing a dominant role.

The breakdown of key support levels—first at $95,000, a major technical threshold, and then at $92,800, the average entry price for short-term holders—has likely triggered stop-loss orders, accelerating a liquidation cascade as Bitcoin traded below these levels.

For the latest insights, updates, and announcements beyond what's included in our bi-weekly newsletter, please refer to our OKX Institutional Telegram channel.

As a private, members-only group, our Telegram channel allows for real-time dialogue where we can discuss and share market coloring, product roadmaps, and more with our valued institutional clients and partners.

Disclaimer

This article may cover content on products that are not available in your region. It is provided for general informational purposes only, no responsibility or liability is accepted for any errors of fact or omission expressed herein. It represents the personal views of the author(s) and it does not represent the views of OKX. It is not intended to provide advice of any kind, including but not limited to: (i) investment advice or an investment recommendation; (ii) an offer or solicitation to buy, sell, or hold digital assets, or (iii) financial, accounting, legal, or tax advice. Digital asset holdings, including stablecoins and NFTs, involve a high degree of risk, can fluctuate greatly, and can even become worthless. You should carefully consider whether trading or holding digital assets is suitable for you in light of your financial condition. Please consult your legal/tax/investment professional for questions about your specific circumstances. The analysis of political events and their potential impact on digital assets is speculative and should not be considered definitive or predictive. Web3 features, including OKX Web3 Wallet and OKX NFT Marketplace, are subject to separate terms of service at www.okx.com.

© 2025 OKX. This article may be reproduced or distributed in its entirety, or excerpts of 100 words or less of this article may be used, provided such use is non-commercial. Any reproduction or distribution of the entire article must also prominently state:"This article is © 2025 OKX and is used with permission." Permitted excerpts must cite to the name of the article and include attribution, for example "Article Name, [author name if applicable], © 2025 OKX." No derivative works or other uses of this article are permitted.