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Important Arbitrage Trade Closes in the Spot Bitcoin ETF Era

The launch of 11 spot Bitcoin ETFs in the US has led to a 24% drop in open interest for Bitcoin futures, signaling a shift in investor preference from futures to direct crypto holdings.

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The introduction of exchange-traded funds (ETFs) in the United States that hold the largest crypto directly has dampened demand for Bitcoin futures.

After 11 spot Bitcoin ETFs started trading three weeks ago, data shows that outstanding contracts, also known as open interest, for CME Group Bitcoin futures fell about 24%.

That follows Bitcoin's 157% climb last year when open interest was at an all-time high due to the ETFs' anticipated release.

With the long-awaited conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF, the discount has been abolished.

This marks the end of an arbitrage trade that has been both successful and disappointing over the years.

"CME futures have grown in popularity because of their regulated Bitcoin exposure, a function that spot ETFs will now provide," a chief investment officer at a large U.S. asset management firm in Boston told Blockhead.

"Additionally, the $21 billion Grayscale Bitcoin Trust (GBTC) employed the futures in an important arbitrage play, but that transaction is near its end," added the CIO.

Data from Coinglass shows that there has been a general slowdown in Bitcoin futures activity recently, with the decline in CME open interest being the main cause.

"The real question now is - if the cooling demand for Bitcoin futures is a sign that institutional investors are positioning themselves for the longer term instead of leveraged positions, as with any regulated asset," a digital assets fund manager in New York told Blockhead.

Market makers believe that the US spot Bitcoin ETFs period presents an opportunity to restore the crypto markets' health after the FTX exchange and Alameda Research, two related hedge funds, collapsed.

There was an "Alameda gap" in crypto trading caused by lower volumes and a diminished capacity to absorb orders smoothly after the two previous pillars of digital assets collapsed in late 2022 due to a drop in token values and a massive scam.

Token markets are created by market makers who use their own or borrowed money to try to earn a profit off of price disparities between tokens.

Digital asset spot trading volumes hit a 19-month high of over $1.4 trillion in January, as reported by CCData. Nonetheless, this is less than the average monthly amount during the pandemic-era crypto bull run of 2021.

January, the month of huge fluctuations caused by the SEC's approval of the ETFs, has seen a 1% increase in Bitcoin's value. At the start of product trade, the token price rose to around $49,000; however, it fell to $38,510 in a 12-day losing period.

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Still, last month was the fifth consecutive month of gains for the token, marking the longest winning streak for Bitcoin since an easy money rally during the pandemic.

The previous longest run was from October 2020 to March 2021, which lasted six months.

That was also the year Bitcoin reached nearly $69,000, its record high in November 2021.

Bitcoin's losses have also eased; the token last changed hands at about $42,500.