Spot and Derivatives Intertwined: How ETFs Are Reshaping the Crypto Capital Landscape

The crypto market has reached a turning point. After US regulators approved spot Bitcoin trading products in January 2024, this once fragmented market began to show a new organizational pattern. But what has changed is not the blockchain itself, but the infrastructure surrounding asset liquidity—ETFs have become the engine of this structural shift.

Why ETFs Are Changing the Game

The power of ETFs doesn’t lie in how tokens are verified or transferred, but in providing a compliant channel. Traditional investors can finally access crypto assets through familiar brokerage interfaces, activating liquidity. Most importantly, price discovery between crypto and traditional markets is beginning to synchronize.

Spot and futures ETFs operate on completely different logic. Spot products directly hold the underlying assets (Bitcoin or Ethereum), which are removed from trading markets once they enter custody, tightening the effective circulating supply. Futures ETFs gain exposure through futures contracts on exchanges like CME, without physical token transfer, but they profoundly influence the basis, hedging demand, and open interest trends in derivatives markets.

New Channels for Capital Inflows and Outflows

When investor demand for ETF shares rises, authorized participants immediately create new shares. This process seems simple but actually means large amounts of capital are directed toward purchasing the underlying assets supporting these shares. When investors redeem, the reverse operation pulls funds and holdings out of the market.

The most direct result of this mechanism is that ETF capital flow data becomes a “heartbeat monitor” for the market. Previously, demand was dispersed across hundreds of exchanges and difficult to track; now, it is concentrated in a few key data sources that can be monitored in real time. Capital inflows drive spot purchases and custody growth, while outflows may trigger selling of the underlying assets or reduction of exposure.

Quantitative Signals from Institutional Participation

Since 2024, the rising interest from institutions is no longer speculation but verifiable data. Coinbase’s institutional investor survey shows that among organizations already invested in crypto assets, 64% plan to increase their allocation over the next three years; among those not yet invested, 45% also have plans to allocate.

The activity in derivatives markets further confirms this trend. Data released periodically by CME shows that in Q4 2023, the average number of large open interest holders reached 118, with a peak of over 137 in mid-November. By Q2 2024, the number of large open interest holders hit new highs, with crypto futures open interest reaching a record of 530 contracts in mid-March.

The significance of open interest lies in its direct reflection of the size of institutional positions and market expectations. The more contracts, the more large players hold unsettled positions, often indicating increased market participation and potential for higher volatility.

Three Dimensions of Liquidity Revolution

Modern liquidity is not just about trading volume but also about the ability to execute large transactions smoothly without causing significant price swings. The ways ETFs improve liquidity include three dimensions:

First, market makers are attracted into the ETF ecosystem. Shares themselves become new tools for quoting, hedging, and arbitrage. Second, arbitrage linkage becomes extremely tight—when ETF share prices deviate from implied value, arbitrageurs quickly intervene, automatically narrowing spreads and reducing pricing discrepancies across markets. Third, demand shifts from thousands of dispersed addresses to a few visible main products, changing the rhythm and predictability of liquidity supply.

The “Macro” of Volatility

ETFs do not eliminate volatility. Bitcoin and Ethereum still experience sharp fluctuations driven by policy, leverage, and risk appetite. What changes is the composition of the drivers behind volatility.

With ETFs, crypto assets are more easily incorporated into multi-asset portfolios as risk management tools. This significantly increases their sensitivity to interest rate expectations, systemic liquidity conditions, and macro risk sentiment. At the same time, systematic strategies based on volatility or correlation rebalancing can more easily impact the market. Volatility is no longer “crypto market volatility” but “asset allocation adjustment volatility.”

Price Discovery: From Fragmentation to Unity

In the past, price discovery in crypto markets was highly fragmented—price movements on one exchange took time to propagate to derivatives markets, offshore venues, and other regions. ETFs, by injecting a highly liquid, regulated instrument that must stay closely linked to the underlying assets, greatly shorten this process.

This also results in another effect: an explosion in the number of observers. When Bitcoin can be purchased through a broker account and listed alongside Apple stock in the same trading software, its exposure and market response speed undergo a qualitative change. Macro events are translated into crypto prices more quickly.

Special Considerations for Ethereum ETFs

As a proof-of-stake network, Ethereum should generate yields through staking. However, spot Ethereum ETFs face a design dilemma—they provide price exposure but do not include staking yields. Major issuers like BlackRock have explicitly stated that they currently have no plans for staking, meaning holders cannot earn the additional on-chain staking rewards.

This design choice impacts how investors position their portfolios. But the market is evolving—by 2025, new structures are emerging. REX-Osprey’s ETH+Staking ETF combines spot exposure with staking rewards, marking an iteration based on market demand.

Chain Reaction in the Derivatives Market

The emergence of ETFs has forced market makers to develop hedging tools. Futures and options quickly became essential for quoting ETF shares and managing inventory risk. Regulators have also followed suit—in September 2024, the SEC approved options listing for spot Bitcoin ETFs, providing institutions and traders with more precise hedging and leverage tools.

Options markets indeed enhance liquidity but also introduce more leverage risk, with the ultimate effect depending on participant behavior.

Emerging New Risks

The benefits of ETFs come with new hidden dangers. Custody concentration is one example—large amounts of Bitcoin or Ethereum may ultimately be concentrated in a few regulated custodians, which, while not directly threatening security, can create operational risks and market structure issues.

Reversal of capital flows is another concern. ETFs make capital inflows and outflows extremely convenient. During market stress, large-scale redemptions could trigger multiple products simultaneously, creating compounded selling pressure. Additionally, ETF expense ratios become a new competitive dimension. Investors will compare costs as they do with stock funds, driving issuers to compete and ultimately influencing which market makers and authorized participants dominate capital flows.

New Indicators for Traders to Watch

Market observers now need to track new indicator combinations: ETF net inflows as a visible signal of investor pressure; custody holdings data representing accumulated liquidity supply; CME large open interest changes, which often signal adjustments in market participation depth; and options activity related to ETFs, reflecting hedging and leverage trading activity.

Conclusion

ETFs have profoundly reshaped the structure of the crypto market by changing how assets are packaged, sold, and hedged. The regulatory approval in January 2024 is just the beginning; the real transformation lies in rewriting capital flow patterns—from dispersion to concentration, from opacity to transparency, from fringe to mainstream. The appearance of new indicators like open interest, capital flows, and custody scales vividly reflects this ongoing shift.