Hedge funds that previously fueled the frenzy in US Bitcoin exchange-traded funds (ETFs) are now rapidly withdrawing. Data compiled by CF Benchmarks, a wholly-owned subsidiary of cryptocurrency exchange Kraken, shows that the total allocation to Bitcoin ETFs by large hedge funds fell by 28% from the third quarter to the fourth quarter of 2025.

The price of Bitcoin has declined by nearly 50% from its peak of over $126,000 in October of last year. Influenced by fresh panic sweeping global markets due to US tax concerns, Bitcoin fell as much as 4.8% during early Asian trading on Monday, dropping to around $64,300, its lowest level since February 6.

This decline extends a prolonged sell-off that began in October. Since then, as digital asset prices have slid and once highly profitable trading strategies have seen their returns diminish, fast-money investors have continued to reduce their exposure.

Gabe Selby, Head of Research at CF Benchmarks, wrote in a research report dated February 19th, "The dominant theme over the past two quarters has been de-risking by hedge funds. The downturn from the October peak appears to have triggered systematic position reductions."

This divestment is clearly visible in regulatory filings. Brevan Howard significantly adjusted its holdings in the BlackRock iShares Bitcoin Trust (IBIT), becoming the largest seller of this spot ETF in the fourth quarter. Its shareholding decreased by approximately 86% to 5.5 million shares, reducing the value of its spot holdings from about $2.4 billion to $275 million.

This retreat stems partly from a simple reversal in price momentum. Bitcoin has fallen in tandem with macroeconomic risks, sometimes even more sharply, challenging the institutional narrative that Bitcoin can act as a hedge against inflation, currency devaluation, or stock market pressures.

However, there are also structural reasons for this pullback.

Over the past two years, Bitcoin basis trading became one of the hottest strategies for hedge funds. Funds would buy spot Bitcoin ETFs while simultaneously shorting Chicago Mercantile Exchange (CME) futures, profiting from the premium of futures over the spot price. This was a near-universally acknowledged arbitrage trade that did not require taking a directional view on the price.

According to Amberdata, in the months following the initial approval of Bitcoin ETFs, this strategy often yielded annualized returns in the double digits. However, as more capital flowed in and compressed the arbitrage opportunity, the yield had fallen to around 4% as of February 9th.

Some investors have increased their positions against the trend during the decline. The Emirate of Abu Dhabi increased its IBIT holdings by 46% in the fourth quarter of 2025.

Data from CF Benchmarks shows that investment advisors have increased their holdings of IBIT every quarter over the past year, with a year-on-year increase of 145%. Selby wrote that such capital likely represents a more stable source of funds, as they "typically do not trade around short-term volatility."

He wrote, "Over the past year, the speculative capital that drove this rally has retreated, being replaced by a more sustained holding structure. This transition is occurring even as prices correct."