Glassnode analysts reported on Wednesday that institutional traders adopting a cash-and-carry arbitrage strategy are significantly influencing the demand-side pressure for U.S. spot exchange-traded funds (ETFs). This strategy involves buying bitcoin spot and immediately hedging it by selling bitcoin futures, which may reduce the immediate upward pressure on the spot price typically seen if traders were only purchasing the spot asset.

The analysts observed that the CME Group futures market's open interest has stabilized above $8 billion after reaching a record high of $11.5 billion in March 2024. This indicates a growing number of traditional market traders are adopting this arbitrage strategy, which has become a substantial source of ETF demand. ETFs are being used to gain long-spot exposure while accumulating a growing net-short position for bitcoin in the CME Group futures market.

A cash-and-carry trade involves buying an asset in the spot market and simultaneously selling, or shorting, the same asset in the futures market. Profits are realized if the difference between the spot and futures prices (the basis) narrows or becomes positive by the futures contract's expiration. This strategy is market-neutral, coupling a long-spot position with a sale in a futures contract where the asset trades at a premium.

Alistair Byas-Perry, Head of Capital Markets at 21Shares, explained that spot bitcoin ETFs are used by various market participants, with the cash-and-carry trade being a common strategy. Bitcoin futures prices often trade in contango, making the basis between the spot and futures price attractive for some investors. Hedge funds are particularly active in this space, going long on bitcoin through spot bitcoin ETFs and shorting bitcoin futures through CME Bitcoin Futures.

Public 13F filings show many hedge funds holding spot bitcoin ETFs, potentially for basis trade purposes. However, hedge funds often employ various, sometimes complex, trading strategies that are rarely disclosed. Spot bitcoin ETFs are seeing demand from these actors, contributing to the success spot bitcoin ETFs have had this year. This strategy was commonly used on spot bitcoin ETPs in Europe last year, with many hedge funds switching from European bitcoin ETPs to spot bitcoin ETFs due to better on-screen liquidity for U.S. ETFs.

The adoption of cash-and-carry trades by institutional traders is shaping the dynamics of the bitcoin futures market and driving the demand and success of spot bitcoin ETFs in the U.S. As these strategies evolve, they are likely to continue influencing the broader crypto market and the financial instruments linked to it.