Will Sluggish Q2 Basis Trade Impact ETF Demand and Limit Bitcoin’s Rally Potential?

The recent dynamics surrounding Bitcoin ETFs raise critical questions about the future demand for these investment vehicles amid shifting market conditions.

• Hedge funds’ cautious allocation strategies in Q1 2025 have set the stage for ongoing volatility in Bitcoin ETF demand.

• Despite a brief rebound in April, overall sentiment remains fragile due to prior outflows and market uncertainties.

This article explores the impact of recent ETF allocations on Bitcoin’s market stability and potential future trends.

Understanding Q1 2025 ETF Exposure Dynamics

In Q1 2025, multiple hedge funds slashed their Bitcoin ETF positions, reflecting a hesitant market outlook. Notably, Millennium Management LLC curtailed its holdings in BlackRock’s IBIT by a staggering 41%, while simultaneously exiting the Invesco Galaxy Bitcoin ETF.

Overall, the average portfolio allocation in IBIT reported a decline of 15.6%, as reflected in data from Fintel. This reallocation coincided with a notable drop in Bitcoin prices, falling from approximately $109,000 to $76,000 during the quarter.

Market Forces and the Basis Trade Collapse

The significant reduction in basis trade—a strategy wherein investors profit from discrepancies between spot prices and futures—has been pivotal in hedge funds’ decisions. As noted by Bitwise CIO, Matt Hougan, the remarkable 15%-20% annualized returns experienced at the end of 2024 dwindled drastically to below 4% in March 2025. This shift has fueled caution among institutional investors.

Source: Velo (BTC annualized basis trade)

The narrowing of the basis may explain the reduced appetite for Bitcoin-related instruments, which experienced over $4 billion in outflows during February and March. Although April brought a surge in investor interest, the overall narrative remains clouded by earlier losses.

The Renewed Demand in Q2 2025

April to mid-May saw a turnaround in ETF inflows, totaling $5.2 billion, as optimism returned to the market. This renewed activity has propelled Bitcoin prices to exceed $100,000 for the first time since February 2025, suggesting a shift in investor sentiment.

Current Market Sentiment and Future Outlook

While the influx into U.S. spot Bitcoin ETFs indicates stronger market confidence, any subsequent dips in demand may signal a localized peak for Bitcoin. As of this writing, Bitcoin trades around $103,000, illustrating a significant recovery from earlier lows.

Source: CryptoQuant

The current indicators from the CryptoQuant Bull Score Index, showing a reading of 80, suggest a bullish sentiment comparable to previous market upswings.

Conclusion

As the market grapples with evolving ETF strategies and changing demand dynamics, the trajectory of Bitcoin remains uncertain. The interplay between ETF inflows, hedge fund reallocations, and the ongoing basis trade situation will critically shape future market movements. Investors should remain vigilant to these trends, as they could provide insights into Bitcoin’s next phase of market performance.