Open Positions in CME-Based Bitcoin Futures Slump to 5 1/2-Month Low

Open interest in the CME's standard bitcoin futures contract has hit the lowest since mid-December.

Jun 4, 2021 at 11:00 a.m. UTC
Updated Sep 14, 2021 at 1:06 p.m. UTC

The total amount of funds allocated in "standard" bitcoin futures contracts on the Chicago Mercantile Exchange (CME) slid to an almost six-month low Wednesday, indicating a decline in institutional activity. 

The dollar value of open interest – futures contracts traded but not liquidated with an offsetting position – dropped to $1.36 billion, the least since Dec. 16, data from Skew shows. The level has more than halved since mid-April, when the U.S-based Coinbase exchange debuted on Nasdaq. 

The number of open contracts also fell, sliding more than 22% in recent weeks to 36,265, according to data provided by Glassnode. These regulated standard futures contracts trade in 5 BTC denominations, require a large capital outlay and are considered synonymous with institutional participation.

"The CME was the favorite liquidity avenue for institutions to hedge their GBTC [Grayscale bitcoin trust] exposure," Crypto finance firm Amber Group told CoinDesk in a Telegram chat. "However, ever since the GBTC premium eroded, there's been a lesser impetus for these sort of flows."

The Grayscale Bitcoin Trust (GBTC), from the crypto-asset manager Grayscale, is the largest U.S. investment vehicle for buying bitcoin (BTC) through a stock exchange. Accredited investors can buy shares of the trust at the net asset value, but aren't allowed to sell them on the secondary market for six months. New York-based Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.

Until February, GBTC shares traded at premiums as high as 40% to the price of bitcoin, attracting institutional investors who intended to redeem them at a premium six months later. They hedged the exposure with a short futures position on the CME. That pushed up the open interest on the CME, making it the biggest futures platform at the end of December.

"Institutions were hedging the outright delta [long GBTC exposure] and capturing the subscription premium," Amber Group said. 

GBTC premium

The trade lost its shine after the premium turned into a discount in February. The situation has persisted ever since, causing a decline in open interest on the CME.  

In addition, the price crash in May crowded out excess bullish leverage from the market, leading to a drop in open interest on the CME and other major exchanges. 

The amount deployed in futures contracts across the globe is about $11.9 billion, down from $19 billion a month ago. Bitcoin tanked 35% in May on concerns regarding the negative environmental impact of cryptocurrency mining and a regulatory crackdown in China. 

Futures contracts on non-regulated exchanges like Binance and Deribit trade in denominations of 1 BTC, one-fifth the size of the CME's, and are taken to represent retail activity. The CME launched micro bitcoin futures last month. A micro bitcoin is equivalent to 1/10th of one bitcoin.

The CME and other exchanges could continue to see low activity for some time, as the futures premium has declined with the recent price sell-off, making carry trades unattractive. 

Cash and carry arbitrage, a market-neutral strategy, involves buying an asset in the spot market against a short position in the futures market when the futures draw a significant premium relative to the spot price. That alllows traders to make a fixed return as the futures premium decays over time and converges with the spot price on the expiry date. 

Bitcoin annualized three-month futures premium

Carry trades now offer significantly less yield than they did at the height of the bull market. Skew data show the CME currently offers an annualized rolling three-month basis (futures premium) of 3%, compared with 12% in mid-April. Other exchanges have seen a similar drop, with Binance futures drawing a premium of 8% against 42% in April.  

"The recent crash has depressed yields across the ecosystem," Rahul Rai managing partner at Gamma Point Capital, said. "So carry trades have become less attractive, and there is less institutional demand to short futures against the long position in the spot market." 

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