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ToggleShort interest surges in Bitcoin futures: Market neutral strategies at work
Bitcoin futures net short position among leveraged funds reaches record high. However, this isn't a case of strong bearish sentiment among hedge funds. Rather, it is more likely due to the increasing popularity of market-neutral strategies.
( Financial Times: CME plans to launch Bitcoin spot trading, Wall Street interest surges )
basis trading arbitrage strategy
Basis trading is a strategy designed to profit from the difference between the spot market and the futures market. The reason for the recent surge in short positions in CME (CME Group) Bitcoin futures contracts may be based on this opportunity.
You can see the data compiled by The Block. The short positions invested by hedge funds have increased significantly, reaching as high as 7.5 billion US dollars:
Bitcoin spot ETF allows more people to arbitrage
Basis trading has attracted a lot of capital since the launch of spot Bitcoin exchange-traded funds (ETFs) in January. These ETFs allow traders to buy the ETF and sell Bitcoin futures contracts at a higher price, profiting from the difference. This process is known as cash-and-carry strategy, and trading through regulated brokers has become easier.
Are ETFs just for arbitrage?
The increase in short positions in futures coincides with a pickup in demand for spot Bitcoin ETFs. Together, these funds now hold more than $58 billion in assets. Despite the prevalence of basis trading, Vetle Lunde, an analyst at research firm K33, said this should not be seen as a major driver of inflows into ETFs. "The notion that ETF inflows were offset by CME shorts is wrong," he said. "Organic directional demand is the key reason behind strong ETF inflows, rather than traders driven by contango arbitrage."
The impact of basis trading on ETF data: not entirely organic
Basis trading is currently a popular strategy, but it complicates the interpretation of short-term ETF flow data. Since their launch in January, these funds have seen net inflows of $15.3 billion, and they often experience single-day net outflows of hundreds of millions of dollars. Analysts say net inflows into Bitcoin ETFs are closely watched every day, but these inflows do not always represent organic demand for Bitcoin.
What to think about Bitcoin’s short position on CME
Hedge funds’ net short position in Bitcoin futures hit a record high, which isn’t necessarily a bearish sign. Rather, it highlights the growing popularity of basis trading strategies, fueled by the rise of spot Bitcoin ETFs. This also explains why CME wants to offer Bitcoin spot trading itself.
