Leveraged funds trading bitcoin futures on the Chicago Mercantile Exchange (CME) continue to trim their short positions initiated earlier this year, mostly as a hedge against risks associated with the “Grayscale carry trade."

The Commodity Futures Trading Commission (CFTC) released data on Friday that showed leveraged funds held a net short position of 10,000 contracts in the week ended June 29. That is down from about 30,000 in December and represents the lowest tally of net shorts since September, according to data source Skew.

"This probably has more to do with leveraged funds hedging their long positions in the Grayscale Bitcoin Trust (GBTC) shares using the CME futures,” said Matt Blom, global head of sales and trading at Eqonex. 

“As they unwind GBTC positions during the unlock windows, and do not add further trades due to the Grayscale premium trading at a negative, we have seen the need to use these derivatives decline,” Blom said.

The Grayscale Bitcoin Trust, the world’s largest digital-assets fund manager, allows institutional investors to gain exposure to bitcoin through shares in the trust, which currently holds 654,600 BTC. (Grayscale is a unit of Digital Currency Group, which also owns CoinDesk.)

Investors can buy GBTC shares directly at the net asset value (NAV) in daily private placements by depositing bitcoin or U.S. dollars. The shares can be sold in the secondary market only after a six-month lockup period.

Until February, the GBTC shares traded at a significant premium to NAV for various reasons. So accredited investors took carry trades. That means they deposited bitcoin they owned or had borrowed into the trust, and in return they got shares at NAV, hoping to offload them at a premium in the secondary market at the end of the six-month lockup period. The obvious risk associated with this type of setup is a potential fall in bitcoin’s price, or a narrowing or erosion of the GBTC premium. 

As such, many carry traders hedged their risk by taking short positions in the CME futures, which are now being squared off alongside the release of the GBTC shares locked in January. 

According to data tracked by bybt, nearly 40,000 GBTC shares will be released this month. Investors are expected to liquidate these shares in the secondary market, squaring off the long leg of the carry trade, and use the proceeds to buy back bitcoin to return to the base portfolio or pay back the borrowed coins. 

“Funds which bought GBTC shares at NAV also took shorts in CME futures to hedge against the risk of a sell-off in bitcoin,” Charlie Morris, chief investment officer at ByteTree Asset Management, told CoinDesk. “Now, this trade is being unwound.” 

Another reason for the continued decline in the net shorts is the low incentive to take fresh GBTC carry trades. With the GBTC shares still trading at a discount of 10% to NAV, investors, particularly those with a longer term horizon, may choose to buy GBTC shares in the secondary market rather than buy bitcoin and turn it over to the trust. 

“Investors looking for long-term passive bitcoin exposure are probably better off buying GBTC over spot bitcoin since you get paid to wait more via the discount than you pay in excess fees,” David Grider, strategist at investment research firm FundStrat, wrote in an email.

Lastly, the cash-and-carry arbitrage, which involves buying bitcoin in the spot market and selling bitcoin futures, has lost its shine with three-month futures premium now in the single digits. So trading firms, including the $135 million crypto hedge fund LedgerPrime, are no longer interested in taking these carry trades. 

“The spread that was evident earlier in the year has evaporated, and with potential capital inflows into DeFi (decentralized finance) ecosystems, courtesy of Aave- and Compound Finance-inspired institutional offerings,” Denis Vinokourov, head of research at Synergia Capital, said. 

“The current futures structure does not offer enough risk/reward for institutional investors to deploy their capital to.”

Many trading firms took carry trades during the height of the bull run in mid-April when the three-month futures were trading at a premium of over 20% on the CME and nearly 40% on Binance and other non-regulated exchanges. 

Looking ahead, net shorts may spike if the bull returns to the bitcoin market, lifting premiums and making carry trades attractive again.