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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. UTC
Updated Sep 14, 2021 at 9:46 a.m. UTC

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

Commitment of Traders report data (negative figures represents short positions).

  • “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

Daily chart of bitcoin prices

  • 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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