A recent analysis by cryptocurrency analysis company IntoTheBlock examined the rise and subsequent decline in Bitcoin price. The report suggests that hedge funds' carry trade positions likely pushed the market higher in the 4th quarter and may have led to a decline in the 1st quarter of 2024.
Carry trading is known as a trading strategy that involves borrowing at a low rate of return and investing in an asset that provides a higher rate of return. This strategy typically involves borrowing in a low-yielding currency and converting the borrowed amount into another currency.
Just a month before the ETF approvals, Bitcoin futures were trading at a premium (contango) of over 2% compared to spot prices. According to analysts, this situation offered funds the opportunity to carry trade by taking long positions in spot transactions and short positions in futures transactions. This strategy allowed them to profit from the price difference and gain 25% to 30% on an annual basis.
However, as the ETF approval window approached, the premium on futures quickly turned into a discount. This change, pioneered by BitMEX on January 6, shows that companies started to take profits, which caused prices to fall.
*This is not investment advice.