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The recent downturn in cryptocurrency markets has prompted various discussions regarding its causes. One emerging issue stands out as a fundamental reason for this decline. Although it may seem complex to many, this article delves into the details of the increased ETF outflows and the rapid losses experienced by BTC.
BTC CME Trade Strategy
Demand consistently rises during bull markets, leading to positive premiums in CME futures contracts. We previously observed this arbitrage strategy in the GBTC sector until the weakening trend in 2021. The enthusiastic interest in cryptocurrencies, especially under Trump’s administration, drove CME open positions to new all-time highs, yet recent events have disrupted this winning strategy.
Bitcoin Basis Trade
The basis trade strategy refers to earning profits from the discrepancy between Bitcoin’s futures and spot prices. It operates under two rules: first, that futures prices, such as three-month contracts on CME, must align with spot prices at expiration; and second, that one can buy futures at a premium price.
Spot price reflects Bitcoin’s current trading value on centralized exchanges, while futures prices signify agreements to buy or sell Bitcoin 
$104,692 at a specific price in the future. The expectation is that futures prices will trade at a premium above spot prices.
For instance, if the spot price is $89,000, the three-month futures price might be around $93,000. By engaging in basis trade, one can purchase BTC ETF or directly buy BTC while also acquiring a CME contract, allowing for profit by waiting three months regardless of price fluctuations.
During periods of high demand, the basis yield surged into double-digit territories. However, the yield has recently declined, dropping to around 4% on February 24. This decline has rendered the strategy less profitable compared to safer investment alternatives, leading to sell-offs in both the spot and ETF markets as the allure diminishes.
In summary, hedge funds initially locked in positive premiums for guaranteed profits. As these profits yielded lower returns compared to alternative safe investment products, interest in the strategy waned, prompting sales in both spot and ETF channels. A restoration of the negative sentiment plaguing risk markets is essential for a resurgence in futures premiums.
