Wall Street firms are withdrawing from Bitcoin arbitrage trading

According to Bloomberg, a key arbitrage trade in the cryptocurrency derivatives market is unraveling. Wall Street institutions previously employed a "cash-and-carry trade" strategy by buying spot Bitcoin and selling futures to capture the price difference. However, due to a surge of capital inflow, the price difference has sharply narrowed, with the annualized yield dropping from about 17% a year ago to around 4.7% now, barely covering the cost of capital.

As arbitrage profits shrink, the value of open contracts for Bitcoin futures on the Chicago Mercantile Exchange has significantly decreased from its peak and has been surpassed by Binance. This mainly reflects a strategic withdrawal by large U.S. accounts such as hedge funds. The maturation of the market has provided institutions with more tools to express directional views, leading to a narrowing of price differences between exchanges, which naturally squeezes arbitrage opportunities. Market participants point out that the era of nearly risk-free high returns may be over, and traders are shifting towards more complex strategies in decentralized markets. CME Group stated that institutional investors are diversifying from Bitcoin to other tokens like Ethereum.