Hayes: Bitcoin Drop Tied to Dollar Liquidity, Basis Trades

Arthur Hayes, the former CEO of crypto exchange BitMEX, presents a contrarian explanation for Bitcoin’s recent seven-month low below $90,000. Rather than attributing the decline to institutional selling or reduced government support, Hayes identifies shrinking U.S. dollar liquidity as the primary culprit. “Bitcoin is the free-market weathervane of global fiat liquidity,” Hayes wrote, emphasizing that the cryptocurrency “trades on the expectation of future fiat supply.” This perspective challenges conventional market narratives that focus solely on institutional flows or regulatory developments.

Hayes finds particular significance in Bitcoin’s divergence from traditional equity markets. While Bitcoin erased all its 2025 gains and dropped to multi-month lows, the S&P 500 and Nasdaq 100 stock indexes were approaching all-time highs. This disconnect, according to Hayes, signals that a “credit event is brewing” in financial markets. His analysis suggests that Bitcoin’s price action serves as an early warning system for broader financial stress, preceding potential turmoil in traditional markets by reacting to underlying liquidity conditions.

The market analyst notes that Bitcoin had previously defied declining dollar liquidity metrics since April, which he attributes to institutional buy-ins through ETF vehicles and “liquidity-positive rhetoric from the Trump administration.” However, this artificial support proved temporary as underlying liquidity conditions eventually overwhelmed the market structure. Hayes’s framework positions Bitcoin not merely as a speculative asset but as a sophisticated gauge of global monetary conditions, responding to expectations about future money supply rather than current institutional positioning.

Central to Hayes’s analysis is the revelation that five of the largest holders of BlackRock’s IBIT—the world’s largest Bitcoin ETF—are hedge funds and investment firms like Goldman Sachs and Jane Street using the vehicle for basis trades rather than long-term Bitcoin investments. These sophisticated market participants engage in a strategy that involves buying the Bitcoin ETF while simultaneously shorting Bitcoin futures contracts listed on the CME. The profit comes from capturing the spread between the two related instruments as their prices converge over time.

This trading strategy is capital-efficient because brokers typically allow traders to post the ETF as collateral against their short futures positions. As JPMorgan estimated in April, approximately $400 billion is locked in similar basis trades across the financial services industry. The scale of these operations means that ETF inflows don’t necessarily reflect bullish sentiment about Bitcoin’s future price but rather the profitability of the basis trade itself. When the spread narrows sufficiently, the trade becomes less attractive, reducing institutional demand for the ETF.

Hayes explains that as Bitcoin’s price declines, the “basis”—the price difference between the ETF and futures contracts—compresses, making these trades less profitable. This dynamic creates a self-reinforcing cycle: reduced profitability leads to lower ETF inflows from institutional basis traders, which in turn puts additional downward pressure on Bitcoin’s price. The structure reveals how institutional participation in Bitcoin markets has become increasingly complex, with sophisticated financial engineering playing a significant role in price discovery and market dynamics.

Hayes identifies a critical misunderstanding in how retail investors interpret institutional behavior. When hedge funds reduce their basis trade positions due to compressed spreads, retail investors often misinterpret this as bearish sentiment toward Bitcoin itself. “Now retail believes these same investors don’t like Bitcoin, creating a negative feedback loop that influences them to sell, which decreases the basis, finally causing more institutional investors to sell the ETF,” Hayes explained. This misinterpretation amplifies selling pressure beyond what fundamental conditions might warrant.

The recent outflow data supports Hayes’s thesis. BlackRock’s IBIT recorded a record $463 million one-day outflow on November 14, while crypto funds internationally saw $2 billion in weekly outflows. These movements coincide with the reduced attractiveness of basis trades as Bitcoin’s price declined. Rather than representing a fundamental loss of faith in Bitcoin’s long-term prospects, these flows reflect the mechanical unwinding of sophisticated trading strategies that had previously provided artificial support to prices.

Looking forward, Hayes anticipates further Bitcoin declines before a potential dramatic reversal. His projection hinges on traditional market dynamics: if stocks experience a “10% to 20%” correction while interest rates remain near 5%, he believes the U.S. government will respond by accelerating money printing. This liquidity injection could propel Bitcoin to “zoom” toward $200,000 to $250,000 by year’s end “if the broader risk markets implode, and the Fed and Treasury accelerate their money printing capers.” The analysis presents a scenario where traditional financial stress becomes the catalyst for Bitcoin’s next major bull run.