From Derivatives to ETFs: The Transformation of Bitcoin Trading

A Look At The Past: Derivative Domination

When BitMEX introduced perpetual swaps to the world, BTC and crypto trading in general were fundamentally altered. The market went from spot-only trading (no leverage) to one that permitted 100x leverage. This created more volatility and more inefficiencies, or in other words, more opportunities. More specifically, it shifted the market into a big game of 'bounty tag hunting'.

Bounty tag hunting is essentially a game of liquidating long and short positions. In the absence of outside events (news, technical issues, etc.), the market became a game of hunting vulnerable positions. The first major example of this occurred during the bottoming process in 2018-2019. BTC traded down from $20,000 and bottomed out around $3,000 in December 2018. It then traded around that level for several months. During that time, a massive number of short positions accumulated. These positions were liquidated in early 2019 when BTC pumped rapidly off its low, trading from $3,000 to $12,000 in just 60 days.

To this day, that remains the largest notional OI reduction in the history of BTC leverage trading. We have since seen major liquidation events of similar magnitude, such as the July 2021 squeeze and, more recently, the October 2025 wipeout. And while spot buyers have certainly had an impact on the market, it has been the derivative markets that have either started or ended trends for the most part.

This is how BTC used to trade, like a big video game, forcing out overleveraged players and using their vulnerabilities to spark new trends. However, with the introduction and mass adoption of spot ETF products, the market has shifted into a new meta.

“In a market dominated by leverage, the goal of that market is to separate overleveraged traders from their money.”

The Present: ETFs Steal The Spotlight

The first spot-backed Bitcoin ETFs began trading in January 2024. They have since amassed an AUM of over $150B, and they have become some of the most successful ETFs in history. With these products conducting massive amounts of volume, it should come as no surprise that the market impact has been substantial. What used to be a derivatives-led market has now become a spot-led market. The majority of these ETFs use Coinbase (BTC/USD) for their activity, and we can clearly see that Coinbase is now responsible for creating major inflection points. Small edge leak here, but when Coinbase flow is aggressive on the sell side, price typically bottoms soon thereafter, and vice versa. The traders and investors of these products are now the trend creators, a stark difference from two years ago when derivative traders created trends.

Nowadays, crypto-natives have very little impact on the overall BTC market. Their flow is no longer the dominant force, which means that the 'bounty tag hunting' meta has (somewhat) come to an end. On micro timeframes, leverage traders are still hunted, but true trends are not born from short (or long) squeezes anymore—they start with ETFs. And due to the fact that ETFs are primarily used by US-based legacy traders and investors, US equities have an outsized impact on how BTC trades. We can now see that the most volatile part of the trading day falls between US open and US close. This wasn't the case many years ago, as BTC used to move at any hour of the day.

Through market fragmentation, crypto metrics also matter less and less. These metrics, such as funding rates, futures curves, and premiums, are becoming obsolete. Big funds have now come in to arbitrage the spreads. All of which is to say that the market is trading much differently than it did before. New products and participants have changed the structure of BTC trading, and we expect this meta to hold for quite a while.

Moving Forward: How Do We Adjust To The New Meta?

All-Time highs aren’t the signal they once were

Once upon a time, when Bitcoin made a new all-time high, you could log into your exchange, market long, and not worry much about it. In 2013, that approach produced roughly a 4000% gain with zero drawdown. In 2017, it returned about 1700%, again with zero drawdown. Even in 2020, it still worked, delivering a 240% gain with a maximum drawdown of 13%. That edge disappeared last year. Bitcoin traded about 20% above its prior high, then fell roughly 40% over the following months. It's not a coincidence that the first time the strategy failed was during the era of spot ETFs. Reduced volatility above prior highs is a defining feature of equity indices, and we see this clearly in how the S&P 500 behaves when it makes new highs. As ETF market share continues to grow, it's reasonable to expect Bitcoin to trade less like a high-volatility breakout asset and more like the S&P 500.

A structural shift in crypto market cycles

Many years ago, crypto used to trade in clear-cut cycles. From 2016-2017, it was a bull market. In 2018, it was a bear market. And from 2019-2021, it was once again a bull market, followed by a bear market in 2022. These cycles came to be known as the 'four-year cycle', whereby cycle highs and lows were printed at nearly identical intervals. Moving forward, we expect the cycle theory to break. This market will no longer trade in clear-cut cycles. It is one that, over a long enough timeframe, only trends higher. The old guard will not be pleased with this change, as they have become accustomed to trading bull and bear markets. We implore you to ditch these terms altogether and treat BTC as an asset that is in a perpetual state of 'up only'.

Volatility is subsiding

As Bitcoin's market cap has rapidly grown over the past several years, its price is becoming harder and harder to move. Of course, this is to be expected, as most assets that mature and grow to large sizes see a reduction in volatility. It is important to keep this in mind when looking at the broad picture. The large swings of past cycles, such as the 85% drop in 2018 and the 77% drop in 2022, are merely memories of the past. Those types of drops are no longer likely to occur, barring a catastrophic event. This framework must also be applied to the upside. Big moves that used to occur when BTC traded above prior all-time highs simply do not materialize in the present day. At any given moment, BTC may trade above its prior high and drop below it. Do not read into this, and do not label such price action as 'weak'. Think of BTC as the S&P of crypto: an asset that frequently grinds higher and higher and higher.