CME Bitcoin Short Reaches Extreme Level

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PARIS, FRANCE – APRIL 03: In this photo illustration a visual representation of the digital image … [+] Cryptocurrency, Bitcoin is displayed on April 03, 2019 in Paris, France. Bitcoin is an electronic currency that has experienced an incredible increase in 2017, its price reached 20,000 euros. But, while the cryptocurrency has been trading for a few months around 3,200 to 3,500 euros, it has risen to 5,000 euros since yesterday. According to an analyst, this move would be linked to a single buyer who would have placed a colossal order to catch the price. (Photo by Chesnot / Getty Images)

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The extremely short positioning of bitcoin futures on the CME suggests that cryptocurrency prices could be set for a rebound.

Risk-tolerant investors might consider purchasing the ProShares Bitcoin Strategy exchange-traded fund (ticker: BITO), which tracks the price of bitcoin futures contracts. The recently launched ETF barely changed in the five days to Friday, down 0.5%, according to Yahoo.

What’s important here is that speculators have made historically significant bets that CME bitcoin futures will see prices drop. This is no small gamble when considered collectively. Here’s how:

Speculators, bets on the fall in the bitcoin futures price (short positions) currently exceed those on the rise (long positions) by 6,238 contracts, according to a recent report by New York-based financial firm Macro Risk Advisors. As we say in market jargon, the speculative part of the bitcoin futures market is net short.

The report also clarifies that this short position level is extreme, being 2.7 standard deviations from the average short / long position level in recent history, in this case since the launch of futures contracts on bitcoin CME in 2017.

What does this extreme reading mean? Two things.

First, the short position is a 1% event, according to MRA. That is, this type of short net positioning is not normal for the bitcoin market and it is very unlikely to be repeated on a regular basis. Second, the market is likely to rebound. This is because when the markets see extreme net long or net short positions, asset prices tend to go the other way. At least they do historically. In this case, this would strongly suggest that bitcoin futures prices, as well as bitcoin prices, will rise in the coming weeks as futures positioning returns to a more normal level.

While profit is possible from a likely rebound in the price of bitcoin, that doesn’t necessarily make bitcoin a good bet in the long run. There are a lot of skeptics who see a raw future for cryptocurrency in the longer term. Simply put, traders might be wise to view any rally as a short-term phenomenon.

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