Why Bitcoin Hasn't Hit $100K Yet, and Why That Doesn't Spell Doom

Ric Edelman, founder of Edelman Financial Engines

Why hasn't bitcoin risen to $100,000 yet?

That's a common question these days, and a fair one. After all, the new spot bitcoin ETFs are generating such high inflows that they're buying 10,000 bitcoins a day — while bitcoin miners are only producing 450 new bitcoins daily. With such an imbalance, it's easy to conclude that massive buying into a market with a strictly limited supply has to result in a huge price increase.

But we haven't seen it. Bitcoin's price was about $60,000 three months ago — and that's about where it is now as I write this at the end of June.

How can that be, given that we've seen tens of billions of dollars flowing into the spot bitcoin ETFs?

The answer is simple. If massive buys haven't been causing the price to rise, there can only be one reason: There's been an offsetting series of sells. Or, more specifically, there's a lot of short selling in the bitcoin futures market.

Indeed, bitcoin futures shorts have hit a record high. Does this mean that there's a huge bearish sentiment, and we all ought to be panicking that a bitcoin price crash is imminent? No, and no. No crash is coming, because there isn't bearish sentiment.

Oh, yes, there is a big short position out there, but not due to bearishness. Rather, it's because hedge fund managers are very smart people. And rather than betting that bitcoin's price is going to crash, they are simply engaging in a market-neutral strategy that's making them a lot of money.

It's called the basis trade, and it's gained traction thanks to the launch of spot bitcoin ETFs earlier this year. It's a strategy that exploits the price difference between the spot and futures markets; traders simply buy bitcoin and simultaneously sell bitcoin futures contracts, capturing the price difference between the two.

Hedge funds are using this arbitrage trade to generate profits. (Futures contracts allow investors to buy or sell a product (in this case bitcoin) at a future date without having to own the underlying asset. There's a cost to carry, which is why futures often trade at a premium to the spot — and that's what allows this trade to be profitable.

Now, Let's Talk Numbers

One published report says there's $7.5 billion in net-short futures — compared to just $2 billion back in 2021. The surge in popularity for the basis trade shows the growing acceptance and integration of bitcoin into the financial markets; the rapid adoption of this strategy in crypto reflects the market's maturation.

So, what does this mean for bitcoin's future? In short, don't mistake bitcoin's flat price of the past several months as a problem. Instead, consider this: despite such a large short position, bitcoin's price has remained stable!

That in itself is remarkable, and provides the confidence that as inflows continue from advisors and institutional investors over the next year, bitcoin's price will resume its "up and to the right" trajectory.