Bearish Bitcoin bets could signal the return of this popular trade

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Hedge funds and other large traders continued to accumulate in bearish bets on bitcoin last week even as the cryptocurrency increased price gains.

Leverage funds typically hedge funds and various types of fund managers held 16,000 short positions in bitcoin futures listed on the Chicago Mercantile Exchange (CME) during the week ending August 17, according to data released Friday by the US Commodity Futures Trading Commission, as tracked by data analysis firm Skew. Each CME contract consists of 5 BTC.

The short position count rose 6,000 since July 20 to a three-month high. The price of the cryptocurrency has fallen from $ 30,000 to $ 48,500 in the past four weeks.

CME net short leveraged fund

Source: bias

But the data doesn’t necessarily indicate that traders are betting on outright price cuts.

The spike in short bets for leveraged funds could come from a return to the so-called carry trade, which involves buying the cryptocurrency in the cash market against a short position in the futures market. The strategy seeks to make money through the difference between futures prices and spot prices, also known as the premium, which tends to evaporate as the expiration approaches. This way, a carry trade can pocket a relatively risk-free return.

“I guess it’s mostly carry trades,” said Vetle Lunde, analyst at Arcane Research. “It has increased over the past few weeks during the bullish price action, causing base premiums on CME to be significantly lower than base premiums on offshore futures platforms.”

Three-Month Futures Premium on Bitcoin Futures

Source: bias

The CME currently offers a rolling three-month annualized basis (term premium) of nearly 3% compared to 8.5% to 10% on other offshore exchanges such as Binance, FTX and OKEx. This premium represents the percentage difference between the futures price on a given exchange and the prevailing spot market rate for the cryptocurrency.

The existence of the premium means that a trader could lock in an annualized return of 3% by selling the quarterly futures contract on the CME and buying the cryptocurrency in the spot market, betting that the prices will eventually converge. . Some traders borrow stablecoins to buy bitcoin in the spot market, in which case the interest paid to the stablecoin lender would be subtracted from the net return.

These carry trades have lost their luster in recent months, as the price drop in May squeezed excess leverage out of the market. Notably, the sell below $ 40,000 seen on May 19 liquidated more than $ 8 billion of positions in the derivatives market.

Another factor could be that several major cryptocurrency exchanges, including Binance, the world’s largest exchange by volume, and FTX have recently reduced their leverage limits to 20x (20 times a trader’s money ) vs. 100 times amid widespread criticism of leveraged trading.

“Trading is not making the same profits as it used to be,” Lunde said. At its peak in mid-April, cash-and-carry generated 20% annualized returns in the first month contract, unlike current levels “fluctuating around 1% to 4%.

Bitcoin futures on Binance and other exchanges traded at a 40% premium at the peak of the rise in mid-April.

According to Patrick Heusser, head of trading at Crypto Finance AG, the current yield is not attractive enough for funds to take carry trades.

“If you look at the absolute return you can generate right now, I doubt the ‘carry trade’ is making a comeback,” Heusser said.

“Maybe some market makers or liquidity providers have changed or reshaped its concept of flow,” Heusser added. “Usually the market makers on the CME are the same ones that create markets on native crypto exchanges… and some of those guys are labeled as leveraged funds. “

Also Read: The 3 Reasons Why Bitcoin’s Rise May Slow Down

Market makers are individuals or entities with a contractual obligation to maintain a healthy level of liquidity on an exchange. They ensure that there is sufficient depth in the order book by offering to buy or sell when necessary and maintain a neutral direction book. For example, a market maker who fills a short position in the futures market often takes a short or long position in the spot market or buys a call option.

In this case, according to Heusser, bitcoin market makers may be short on the CME and hedged on native exchanges. It also indicates “a better buying interest on the investment side of the CME,” he said.

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