Retail investors are not the primary force behind spot Bitcoin exchange-traded funds (ETFs), with the bulk of inflows being driven by arbitrage trading hedge funds, according to Real Vision CEO Raoul Pal. Pal's observations highlight the complex dynamics shaping the Bitcoin ETF market.

Pal, citing data from crypto analyst and MV Capital partner Tom Dunleavy, claimed that around two-thirds of net inflows into spot Bitcoin ETFs could be attributed to arbitrage trading. “If this is correct, it shows the vast majority of the ETF flow are just arbitrageurs and retail is not the key driver yet,” Pal stated in a June 11 post on X (formerly Twitter).

The data revealed that the “top 80 holders” of U.S.-based spot Bitcoin ETFs were predominantly hedge funds, with their capital sourced from various institutional and individual investors. These 80 firms collectively hold approximately $10.26 billion worth of spot Bitcoin ETF shares, which constitutes about two-thirds of the $15.42 billion in net inflows since the launch of spot Bitcoin ETFs on January 11, according to Farside Investors.

Among these, international hedge fund Millennium Management stands out, holding $1.94 billion worth of Bitcoin ETF shares—the largest of any firm. On May 16, Millennium Management diversified its Bitcoin ETF holdings across multiple issuers, including Bitwise, Grayscale, Fidelity, BlackRock, ARK, and 21Shares.

Despite Pal's assertions, some industry experts have disputed his claims. Crypto trader Joseph B pointed out that, excluding the Grayscale Bitcoin Trust (GBTC), the ten U.S. Bitcoin ETFs manage $42 billion in assets under management (AUM), alongside short interest on the CME. He argued that while recent inflows might be partly due to the basis trade, this type of trade only constitutes less than 15% of overall ETF flows.

Pal defended his position, emphasizing that the primary activities of the hedge funds involved are arbitrage, rather than directional risk-taking based on the anticipated price movements of Bitcoin. Arbitrage trading involves exploiting short-term discrepancies between the net asset value (NAV) of the spot Bitcoin ETF and the actual price of Bitcoin, allowing traders to profit from these brief inefficiencies.

“When you read through this list, the one thing that jumps off the page is that most of these guys are not 'Buy and Hold' investors,” noted Deep Q Digital CEO Carlos Zendejas, reinforcing Pal's view that the predominant strategy among these top holders is arbitrage rather than long-term investment.

This discourse underscores a critical understanding of the market dynamics influencing Bitcoin ETFs. While retail investors are often perceived as key drivers, the data suggests that sophisticated trading strategies by hedge funds, particularly arbitrage, play a significant role in shaping the landscape of Bitcoin ETF inflows.