According to 10x Research: As the traditional buy-and-hold strategy loses its effectiveness in the ever-evolving cryptocurrency market, a new approach is emerging as the key to profiting with Bitcoin. Despite Bitcoin's recent loss of momentum, one of the top trades from earlier this year continues to generate returns, even accelerating in the current environment. While this method requires more effort than simply holding, it offers significant upside potential.

Bitcoin ETF Flows Struggle Amid Market Headwinds

As of August, Bitcoin ETF flows have entered their eighth month, with August shaping up to be the second-worst month so far, recording $320 million in outflows. Only April saw worse performance with $345 million in outflows. Although May and July experienced stronger inflows of $2.1 billion and $3.2 billion, respectively, these gains have proven unsustainable.

ETF flows have failed to spark bullish sentiment, as Bitcoin remains in a holding pattern, waiting for a major macroeconomic catalyst. Other segments of the crypto market are facing potential outflows in the billions, which might be driving the favored trade to yield even greater profits.

The Shift in Market Dynamics

Recent 13F filings from major asset managers with Bitcoin Spot ETF exposure have done little to ignite bullish sentiment. While firms like Goldman Sachs and Morgan Stanley have noted some interest from high-net-worth clients, hedge funds have been offloading their positions. Millennium, the largest buyer in Q1 with $2 billion invested, has reduced its holdings to $1.1 billion as funding rates declined. Hedge funds, in general, weren't attracted to these ETFs for exponential returns but rather for arbitrage opportunities in funding rates.

Massive token unlocks of $5.2 billion in March and $5.5 billion in June 2024 have added pressure to the altcoin market, contributing to Bitcoin's decline. Although the volume of unlocks has decreased to $2.2 billion in August, the persistent overhang still poses a significant risk to altcoin prices.

Altcoins in a Structural Bear Market

Since December 2022, altcoins have been in a prolonged bear market relative to Bitcoin. During this period, Bitcoin's market dominance hit a low of 39%, while altcoin dominance (excluding Ethereum and stablecoins) peaked at 29%. However, this gap has widened significantly, with Bitcoin's dominance now at 56% and altcoins dropping to just 16%. While it's unclear if Bitcoin's dominance will return to the 70% levels seen in 2019/2020, the current trend suggests that Bitcoin's outperformance could persist for several more weeks or months.

Strategic Hedging: The Key to Profiting Now

Given the current crypto landscape, adopting a hedge fund-like approach is increasingly important, particularly in the absence of a significant altcoin bull market. This strategy emphasizes short-term trading around macroeconomic events when the odds are favorable and tactical, short-term positions. Traders with access to altcoin options and perpetual futures markets can hedge their Bitcoin exposure by shorting a basket of the ten most liquid altcoins outside Ethereum and Solana.

Focus on Risk Management

Investors should prioritize managing downside risk rather than relying on a traditional buy-and-hold strategy. This approach mirrors how hedge funds operate in other financial markets, where they might go long on one asset while shorting another to hedge risk.

The persistent overhang from token unlocks leads venture capital funds and early investors to cash out, creating significant selling pressure and eroding market capitalization. With monthly unlocks ranging from $2 billion to $5 billion, this supply influx far outweighs the modest inflows we're seeing from ETFs or stablecoins, making it difficult for the market to absorb the selling pressure.

Conclusion: Adopt a Hedge Fund Mindset

Adopting a hedge fund mindset, with a strong focus on strategic positioning and risk management, is crucial in the current market environment. Bitcoin is likely to continue outperforming a basket of altcoins, making this a favorable trade setup. With the availability of numerous perpetual futures contracts, traders should find it relatively straightforward to implement this strategy and capitalize on the current market dynamics.