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

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.

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.

OKX conversation on Telegram

For the latest insights, updates, and announcements beyond what's included in our bi-weekly newsletter, head over 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 publication is issued in 10x Labs Limited (“10x Research”). The information provided in the publications are meant purely for informational purposes and should not be relied upon as financial advice. None of the information contained here constitutes an offer, or a solicitation of an offer, to purchase or sell any securities, financial instruments or strategies, or to make any investments. Any opinions expressed are intended to be mere opinions and not investment advice, and nothing herein should be construed as financial, investment, legal or tax advice or advice of any sort. 10x Research does not provide individually tailored investment advice. You are advised to consult with your own professional advisers and to make your own independent decisions regarding any securities, financial instruments, strategies or investments. Any opinions are personal to the author and may be subject to change. These may not necessarily reflect the opinion of 10x Research or its affiliates, officers or employees. This publication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable and we make no representation and assume no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this publication. This publication may contain data from third party sources and may contain inaccurate or out-of-date data. The analysis of political events and their potential impact on digital assets is speculative and should not be considered definitive or predictive. Investment in digital assets carries a high level of risk and may lead to a total loss of capital. To the extent applicable, 10x Research asserts legal ownership and copyright over this publication. This publication may not be used, redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of 10x Research. Any unauthorized use is prohibited. Receipt and review of this information constitutes your agreement not to use, redistribute or retransmit the contents and information contained in this publication without first obtaining express permission from an authorized officer of 10x Research. Copyright 2025 10x Labs Limited. All rights reserved.