Bitcoin (BTC) futures are seeing an increase in net short interest among leveraged funds, although this should not be confused with bearish sentiment among hedge funds. Instead, experts suggest that the rise in short interest is primarily due to the growing popularity of a market-neutral strategy known as basis trading.
Spot Bitcoin ETFs Fueling Core Trading Strategy Adoption?
The basic trading strategy aims to capitalize on gaps between the spot and futures markets, and it is believed to explain a significant portion of the short interest seen in nearly 18,000 Bitcoin futures contracts on the Chicago Mercantile Exchange (CME). according to at Bloomberg.
Ravi Doshi, head of markets at prime broker FalconX, highlighted the popularity of basis trading by pointing out that there are currently more than $7.5 billion in net short futures contracts. In contrast, the maximum short position in 2021 was only $2 billion.
Basis trading has gained ground in cryptocurrencies since the introduction of spot-bitcoin exchange traded funds (ETF) in January. These ETFs have made it easier for traders to execute basic trades, as they can buy the ETFs and sell futures contracts representing Bitcoin at higher price levels, thus profiting from price gaps.
Although there is growing interest in futures contracts, demand for spot Bitcoin ETFs has also rebounded, with these AND F collectively holding more than $61 billion in assets, according to Bloomberg data.
However, Vetle Lunde, senior analyst at K33 Research, cautions against attributing the popularity of basis trading as the main driver of flows into the market. AND F. Lunde points out that organic directional demand is the main source of the strong ETF flow, rather than traders motivated solely by futures premium arbitrage.
Short-term data reflects dynamic market sentiment
The base, representing the difference between spot and futures pricewas strongest from late November 2023 to mid-March 2024, averaging around 20% annualized, with the exception of a brief decline in February.
Since then, the premium has fluctuated between 11% and 16% in recent weeks before dropping to around 6%, according to Lunde.
Despite the considerable popularity of basis trading, it should be noted that short-term trading ETF Flow Data is not always a reliable indicator of investor interest in the asset class.
Although Bitcoin ETFs have seen net inflows of $15.6 billion since their launch in January, recent data shows outflows of $65 million on Monday.
As the cryptocurrency market continues to evolve, the interplay between Bitcoin futures, spot ETFs, and core trading strategy provides valuable insight into the dynamics of investor behavior.
Record interest in Bitcoin futures, driven by the popularity of basis trading, highlights the growing sophistication of trading strategies within the cryptocurrency ecosystem.
At the time of writing, the market leading cryptocurrency is trading at $66,270, indicating a 5% price drop over the past 24 hours. The downtrend will likely continue, with the token’s final support ahead of a potential retest of $65,000 to $66,300.
Featured image from Shutterstock, chart from TradingView.com
