Bitcoin and MicroStrategy: The new favorite of hedge funds, the game of market arbitrage is changing

As the Bitcoin market continues to evolve, hedge funds are gradually becoming the dominant players in this financial game. According to 10x Research's market analysis report, Bitcoin spot ETFs attracted significant inflows at the beginning of 2024, but more than half of them came from carry trades rather than real long-term investments. In addition, MicroStrategy ( now says: Strategy), as a highly leveraged alternative to Bitcoin, also operates through market mispricing, further influencing market price movements. This series of phenomena shows that the bitcoin market has gradually moved from a stage dominated by retail investors to a new era dominated by hedge funds and institutional capital.

Do Bitcoin ETF inflows really represent long-term demand?

Since its launch in January 2024, the Bitcoin spot ETF has attracted a net inflow of $38.6 billion, which at first glance seems to show the high level of interest in Bitcoin from institutional investors. However, the report notes that only 44% (about $17.5 billion) of this is true long-term buying, with the remaining 56% coming from carry trades.

The so-called carry trade, which mainly gains the spread by shorting Bitcoin futures and buying ETFs, means that most of the money flow has nothing to do with the long-term value of Bitcoin, but for short-term arbitrage opportunities. As a result, the widespread belief that ETFs represent institutional adoption of Bitcoin is not entirely accurate, as the real long-term holding demand is much lower than market expectations.

Hedge funds become major players in ETFs

The report further reveals that the main holders of Bitcoin ETFs are not traditional asset managers, but hedge funds and trading institutions. For example:

Major holders of BlackRock IBIT include well-known hedge funds such as Brevan Howard, Symmetry, DE Shaw, Tudor, Farallon, and market makers Susquehanna and Jane Street.

The Fidelity Bitcoin ETF is held by Millennium, Schonfeld, Capula, DE Shaw, Bracebridge and others.

The main goal of these hedge funds is not to hold Bitcoin for the long term, but to take advantage of market arbitrage opportunities. However, when market arbitrage opportunities diminish, these funds may instead withdraw funds, leading to increased market volatility.

Arbitrage opportunities are reduced and market sentiment cools

According to the report, the bitcoin market is currently facing the problem of shrinking arbitrage opportunities, resulting in a slowdown in the flow of funds from ETFs:

Funding Rate Decline: One of the main drivers of market carry trades is Bitcoin's funding rate. However, after peaking at +16.5% in November 2024, it has fallen to +6.2% in February 2025, below the +10% threshold for arbitrage strategies, making hedge funds no longer actively invest.

Impact of Fed policy: Stronger-than-expected U.S. economic data led the Fed to maintain a hawkish stance, further depressing demand for leveraged trading.

Retail investor trading volume declines: US President Donald Trump's inauguration in 2025 was expected to drive market activity, but with the collapse of $TRUMP coins, retail trading momentum has declined, leading to further weakness in market activity.

Together, these factors led to the third monthly net outflow in the history of the Bitcoin ETF in February 2025, making market sentiment conservative.

MicroStrategy's Arbitrage Strategy: Bitcoin Leveraged Instruments Misunderstood by the Market

In particular, the report analyzes how MicroStrategy (MSTR), a company with a large exposure to bitcoin, has capitalized through market mispricing.

In November 2024, MicroStrategy issued additional shares at the height of the market, when its stock market capitalization was equivalent to 2.8 times its Bitcoin holdings, which means that MicroStrategy sold shares at 180% higher market price to raise funds and further purchase Bitcoin.

However, when market arbitrage opportunities diminished, MicroStrategy's stock price began to retreat. The report estimates:

MicroStrategy shares currently price around $300, but based on their Bitcoin holdings, their intrinsic value is only $158-$177.

This means that MicroStrategy is still overvalued by 70-90% and may fall further back to reasonable valuations in the future.

MicroStrategy Convertible Bond Trading: An arbitrage ground for hedge funds

In addition to stocks, MicroStrategy's convertible corporate bonds (Convertible Bonds) have also become the subject of carry trades. These convertible bonds are mainly composed of:

Allianz Global Investors (25%)

Voya Investment、Calamos Investment、State Street

These institutions adopt a hedging strategy of "buying convertible bonds and shorting MicroStrategy stocks" to reduce risk and gain arbitrage space. When MicroStrategy's stock price changes, the value of the convertible bonds is also affected:

When the stock rises, the value of the convertible bond increases, and the hedge fund further shorts the stock.

When the stock falls, the fund covers the short order, slowing down the price decline.

This mechanism explains why MicroStrategy's stock is highly volatile but still able to maintain some support, as the market's institutional trading model has become the dominant influence.

The Bitcoin market is entering an era of hedge fund dominance

Taken together, the bitcoin market has shifted from a retail-dominated phase to a new era of hedge fund and institutional capital control. The report reveals several important trends:

Bitcoin ETFs do not really reflect the long-term investment needs of institutions, but are mainly driven by carry trades.

Hedge funds are major holders of Bitcoin ETFs, and their trading patterns affect market liquidity and volatility.

When arbitrage opportunities decrease, funds will be withdrawn from the market, possibly leading to a price correction.

MicroStrategy is overvalued, and its equity and convertible bond markets are also used as arbitrage tools by hedge funds.

The direction of the Bitcoin market is changing, and future price trends will not only depend on the value of Bitcoin itself, but will be more influenced by institutional arbitrage strategies and macroeconomic policies. In this new game, market participants need to rethink their investment strategies to cope with this institution-led capital game.

This article Bitcoin vs. MicroStrategy: The New Favorite of Hedge Funds, the Game of Market Arbitrage is Changing First appeared in Chain News ABMedia.