March was a big month for Bitcoin. It reached new all-time highs and ETF trading volumes reached $111 billion – almost tripling February’s $42 billion. ETFs purchasing 66,000 Bitcoin worth $3.3 billion, seriously outpaced miner production numbers of around 28,000, with that number soon to be halved. MicroStrategy’s $1.4 billion push to enter Bitcoin’s “1% club” also contributed to the excess demand.
However, even with the halving 15 days away, hedge funds are shorting Bitcoin at record levels. In total, Chicago Mercantile Exchange (CME) traders are short over 98,000 Bitcoin, valued at over $6 billion. Potentially, these shorters believe the halving will be an underwhelming event and expect further downside. However, with Morgan Stanley and UBS racing to offer the ETFs to their clients, the hedge funds may become underwhelmed themselves. The average 1-month BTC return after the 3 previous halvings is 4.2%. 6 months post-halving the average return is 360%. Alternatively, these funds could be running a carry trade, similar to Ethena Finance, which we discussed yesterday. This involves shorting an equivalent amount of Bitcoin as held in a spot position, and capturing the futures funding rates. This leads to a market neutral position and currently generates around a 10% annual return.
Compared to previous weeks, this week’s ETF flows have been relatively subdued. However, Grayscale’s outflows have also been slowing down. On Tuesday, for the first time since the ETFs’ creation, there was a new outflow leader that wasn’t Grayscale. It was Ark Invest’s ARKB, the third largest ETF with over $2.2 billion in assets. ARKB experienced over $87 million in outflows, beating Grayscale’s $82 million. Potentially one of the primary reasons for the outflow is ARKB having the third highest fees, with a holder wanting to re-allocate to one with lower fees. Out of the 11 ETFs, only 4 currently have any fees.
Coinbase is also doing their part to lower fees and speed up transactions for their users. On Wednesday, Coinbase announced they will officially be integrating Bitcoin’s layer 2 Lightning Network in collaboration with Lightspark. This will lead to Coinbase users being able to send and receive Bitcoin instantly with fees under $0.01. The move could increase Coinbase users’ usage of Bitcoin for transferring funds and compete with Ethereum layer 2s or Solana. Even with Coinbase’s own layer 2, Base, booming with $9 million in fees over the past 7 days and transaction numbers making new all-time highs, Coinbase isn’t forgetting the asset that started it all.
