Market News

Popular Hedge-Fund Trade Pushes Bitcoin-Futures Shorts to Record - BLOOMBERG

JUNE 11, 2024

  • Basis trade prompts over $7.5 billion in net short futures
  • Record high in short futures doesn’t indicate directional bets

BY David PanBloomberg News

(Bloomberg) -- Bitcoin futures are seeing a record high in net short interest among leveraged funds, yet don’t mistake that for an overwhelming sense of bearishness among hedge funds. It’s more likely due to an increasingly popular market-neutral strategy. 

What’s known as the basis trade, a strategy which seeks to profit between discrepancies in spot and futures markets, likely accounts for much of the short interest of almost 18,000 CME Bitcoin futures contracts, according to experts.  

“The popularity of the basis trade can be observed through the short interest on CME BTC futures held by hedge funds,” said Ravi Doshi, head of markets at the prime broker FalconX. “There is over $7.5 billion in net-short futures currently. In 2021, when BTC basis was significantly higher than it is now, the peak short position was only $2B.” 

The basis trade has become more popular in the crypto space since spot-Bitcoin exchange-traded funds were launched in January, allowing traders to buy the ETFs and sell futures representing Bitcoin at higher levels and profit from the difference in prices. The ETFs have made this trade easier to run since the pair can be traded via regulated brokers, simplifying initiation of what’s known in crypto markets as a cash-and-carry strategy. 

The rising short interest in futures coincides with a rebound in demand for the spot—Bitcoin ETFs, which collectively now hold a total of more than $61 billion in assets, according to data compiled by Bloomberg. Yet while the basis trade is currently a popular strategy, it should not be mistaken as the main driver of flows into the ETFs, according to Vetle Lunde, senior analyst at K33 Research

“The popular angle that ETF flows are offset by CME shorts is wrong,” said Lunde. “The organic directional demand is the key source behind the strong ETF flow, not traders motivated by the chunky futures premium arbitrage”

The basis was considerably more meaty from late November until mid-March, then hovering around 20% annualized apart from a short slump in February, Lunde said. Since then, the premium had hovered around 11% to 16% in the past few weeks, before dipping to about 6% at present, he added.

Still, the popularity of the basis trade can make the short-term ETF flow data less of a clean indicator when gauging investor interest in the asset class. The funds have seen $15.6 billion in net inflows since their launch in January, yet yesterday they recorded outflows of $65 million, according to data compiled by Bloomberg.  

“Net BTC ETF inflows are scrutinized daily, yet those inflows do not always represent organic demand for BTC,” FalconX’s Doshi said. 


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