Welcome to Deep Flow: our weekly look at the biggest stories in digital assets.

This week, we’ve got a slightly new format for you. Instead of one long-form story, we’re going with a ‘variety’ style more similar to Flow State. Fun for the whole family.

Also, this is a friendly reminder that Deep Flow will go behind a paywall next week! If you want to support us, AND lock in a lifetime 25% discount, you can upgrade your membership below right now.

Flow State will always be free, five days a week. But for the Monday Deep Flows, we’re cooking up some special stuff and would love your support.

Now with that out of the way, let’s dive in.…🌊🌊🌊

Weekly Flows

Looking at the week-by-week flows chart, it’s pretty clear we’ve entered a new phase and have left the April/May drudgery behind.

Five straight weeks of net inflows, after having had four negative ones.

Last week was particularly emphatic: 25.9k BTC ($1.8B) came flooding in.

#SecondWaveSummer

Weekly Leaderboard

Digging in a bit more, we can see who the biggest beneficiaries were.

BlackRock had wild week, with IBIT bringing in 13426 BTC ($935m). FBTC’s 9634 BTC ($671m) was also outstanding.

Some drop off to ARKB (1866 BTC) and BITB (1174), who both had strong weeks despite having a couple of outflow days mixed in.

Networking is a new segment where we take a look at network-level trends.

We’ll warm up to some on-chain data and throw in some funky technical stuff now and then, but for this inaugural edition here’s something on the lighter side.

The Retail Gap

Retail, retail, wherefore art thou retail?

After a long bear market, one starts to feel the itch. A certain restlessness. You’ve weathered the storm, HODLed, and earned your stripes.

And so you begin to wonder…when are the masses of newbies gonna show up and pump my bags??

To phrase it more politely: bull market frenzies of the past have all had a mad retail rush. The signal is less what’s happening with your sober sat-stackers, or your smart money institutions. But more, what’s your uncle’s Uber driver longing at 10x leverage.

If you were around in April 2021 you’ll remember Elon Musk pumping Doge coin on Saturday Night Live, and basically the accompanying hysteria to that event is what I’m taking about.

So - how far away are we from all of that?

Answer: probably quite a distance.

There’s no one bullseye metric to show this of course, but you can do a lot worse than simply looking at Google search trends.

As a general sense of how much people out there in the world are thinking about a particular topic at a given time, it’s a decent proxy for overall Bitcoin interest.

Today, search volume for “Bitcoin” is about where it was a year ago, when the price was $30k and we were very much still in deep bear market territory.

(The same basically goes for “Crypto”, “Buy Bitcoin”, and the other obvious ones).

And zooming out a bit further, the difference between today and the periods of retail mania in the past becomes even more stark.

Google indexes the trends to 100, which is ‘peak popularity’. Everything is scaled from that.

Which means that “Bitcoin”’s most popular search time was the April 2021 cycle top, and today’s popularity by comparison is 20% of that.

Here’s another new segment this week: Close Inspection, where we take a closer look at the most interesting story of the week.

And this week, there was the big question on everyone’s mind:

What’s up with the Bitcoin price?

Or more specifically: with all these ETF flows coming in, why has the BTC price been so flat? What gives? HUH??

I’m not exaggerating when I say we’ve gotten a version of this question dozens of times since the flows started picking up over the past couple of weeks.

And fair enough!

So let’s take a look at some possible answers.

But first, there are a couple of different questions you might have, when it comes to ETF flows moving BTC price:

1. Why doesn’t the price seem to necessarily correspond to big ETF flow on the day they happen?

2. Why hasn’t the price tended to move up over a couple of weeks of big aggregate flows?

The impact of futures trading

There’s a type of answer that could address both questions, and it has to do with the trading of futures contracts that could offset (or, if you like, ‘suppress’) BTC price.

Day-of price impact

Let’s take the ‘day of’ case first. This is speculative but illustrates the kind of activity that can obscure large intra-day moves.

Suppose a large institutional investor wants to invest $300m into IBIT. They want to make a big Bitcoin purchase without moving the market and increasing the price for themselves.

What they could do, is work with the Authorized Participant (broker) to lock in a price today, and actually acquire the Bitcoin over the next two or three days.

The broker would quote a price today and use futures to hedge the position. The broker would then cash-create the ETF over the next couple of days based on spot liquidity.

This provides a better price to the end client (even with broker margin built in) compared to moving the market with a large order.

Cumulative price impact

But what about the impacts of flows over a couple of weeks?

As we discussed up the top of today’s edition, we’ve now had five weeks of inflows in a row, and last week’s was enormous. But it didn’t move BTC much.

One thing people have started to notice is the huge amount of short interest building up in the futures markets. A record amount, in fact.

What does this mean?

Leveraged Funds (i.e. hedge funds) have a record level of short positions in Bitcoin futures. These short positions profit when Bitcoin price goes down.

The process of selling these futures contracts puts downward pressure on BTC price. The market impact is analogous to borrowing Bitcoin and selling it today, with a plan to buy it back at a later date.

Why might traders be doing all this short-selling of Bitcoin?

Hedge funds use a variety of arbitrage strategies to profit from minor price differences in related securities, like spot Bitcoin vs. Bitcoin ETFs or spot vs. futures Bitcoin. These short futures positions have offsetting long positions in related assets. We cover these strategies below.

Arbitrage strategies

Hedge funds employ various arbitrage strategies to profit from price differentials between related securities. Examples include cash-and-carry, basis trades, statistical arbitrage etc.

A general flavor of such strategies is to be long and short related assets to capture small, very low risk profits, which are amplified using leverage and repeated frequently to generate large returns.

New asset classes like Bitcoin ETFs create opportunities for arbitrage trades due to lower liquidity and wider spreads across different trading venues. This leads to increased futures trading as hedge funds seek to capitalize on the inefficiencies.

This also aligns with the data we have on the makeup of the Bitcoin ETF holders from Q1.

As we discussed in our piece from a couple of weeks back, Who Owns the Bitcoin ETFs?, $5.5B of the $9.6B of all institutional investment into Bitcoin ETFs in Q1, was made by Hedge funds. Much of this long exposure likely had corresponding short positions in futures.

You can see this breakdown in the table below.

Alternative reason: people are just selling?

Could all of these sophisticated strategies explain why there’s a bunch of short-selling going on? Sure.

Does that explain why BTC price hasn’t been moving up with ETF flows?

Well, that’s not so clear.

The Bitcoin market is huge. These days it’s doing ~$15-30B in volume a day.

ETFs make up a meaningful, but not determinative amount of that.

The best answer to the question of ‘why hasn’t BTC price gone up?’, is more straightforward: because even though ETFs are buying, other people are selling!

And in fact, we have on-chain data that shows this:

Long-term holders (2+ year holders), are actively selling at the moment. And many others are too, by the way. But comparatively speaking, the LTHs are taking more profits.

So who are these people, and why would they sell right now? With this incredibly bullish set-up in front of us?

Well, for any number of reasons. Life happens. You hit an investment goal, you want to buy a house. Who knows.

Here’s a hypothetical LTH seller I can imagine:

Think back to the ‘Elon on SNL’ episode I mentioned earlier. How many first-time Bitcoin buyers FOMO’d in then, right at the tippy top in April 2021, when BTC was ~$63k?

Lots! Some of them would have sold for a loss at some point since. Some of them would have HODL’d and become hardened Bitcoiners.

And some of them made an investment that went wrong, have been in the red for basically three stressful years, and have been waiting to get back in the green. Now that they are, they’re heading for the exits.

Of course, that’s just one imaginary investor. Like I said, the market is made up of all types, all the time. Short term holders, long term holders, institutions, degens, you name it. All buying and selling every day.

Ultimately, what matters is when momentum swings one way or another, and how BTC reflexively responds. Often in quite short windows of time.

So, if you’re getting a little impatient about the price, and scratching your head at the ETF flows, just take a breath. The Bitcoin spring is always coiling, silently, surely. The energy builds, and then it releases.

And it will happen when you least expect it.

That’s the Deep Flow for this week.

One last tidbit I’ll leave you with, is this snapshot from Fidelity’s 2023 Institutional Investor Digital Assets Study, showing perception of Bitcoin by different demographics.

The legend is missing from this clipped screenshot, but basically Black = Bad.

Turns out, the Boomers are not Bitcoin fans. So, go forth and call your family! There is work to be done.

I’ll see you back here next Monday.

Julian