Leveraged Funds Take Record Bearish Positions in Bitcoin Futures
The funds likely boosted short positions to take advantage of attractive "cash and carry" yields.
Aug 24, 2020 at 10:49 a.m. UTCUpdated Aug 19, 2021 at 3:50 a.m. UTC
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Bearish bets in bitcoin futures from leveraged funds recently rose to record highs on the Chicago Mercantile Exchange (CME) – though that doesn't necessarily imply a fresh sell-off is coming.
- In the week ended Aug. 18, leveraged funds – hedge funds and various types of money managers that, in effect, borrow money to trade – increased their short positions by 110% to a record high of 14,100 contracts.
- The data comes from a Commitment of Traders (COT) report published by the U.S. Commodity Futures Trading Commission (CFTC) on Friday.
- Institutional investors held 1,400 short contracts last week too, per the COT; a number that has also more than doubled
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- “Record shorts [by leveraged funds] were mostly likely a function of attractive cash and carry levels,” according to Skew, a crypto derivatives research firm.
- "Cash and carry" is an arbitrage strategy that seeks to profit from mismatches in pricing between a derivative product and its underlying asset.
- The method involves buying the asset on the spot market and taking a sell position in the futures market when the latter is trading at a significant premium to the spot price.
- Futures prices converge with spot prices on the day of the expiry, giving a risk-free return to a carry trader.
- Bitcoin futures, due to expire on Aug. 28, were trading at a premium of $400 earlier this month, as per TradingView data.
- As the highest premium since April, that may have prompted leveraged funds to make carry trades. Other exchanges like OKEx also witnessed a surge in the futures premium, as discussed last week.
- The premium has declined to sub-$100 levels in the past three trading days (CME futures are closed on Saturday and Sunday), making carry trades relatively unattractive right now.
- Skew, therefore, expects the next CFTC report for the week ended Aug. 25 to show a decline in short positions.
Spot prices
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STORY CONTINUES BELOW
- Having put in lows below $11,400 over the weekend, bitcoin has rebounded to over $11,790 at press time, according to CoinDesk’s Bitcoin Price Index.
- A series of higher lows (marked with arrows) seen on the daily chart suggest the path of least resistance is to the higher side.
- The low of $11,367 registered on Saturday is the level to beat for the bears.
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