Leveraged funds – typically hedge funds and various types of money managers – held 16,000 short positions in bitcoin futures listed on the Chicago Mercantile Exchange (CME) in the week ended Aug. 17, according to data released Friday by the U.S. Commodity Futures Trading Commission, as tracked by data analytics firm Skew. Each CME contract consists of 5 BTC.
The tally of short positions has increased by 6,000 since July 20 to hit the highest in three months. The cryptocurrency's price has risen from $30,000 to $48,500 in the past four weeks.
But the data doesn't necessarily indicate that the traders are betting on outright price declines.
The spike in leverage funds' short bets might have stemmed from a return of the so-called carry trade, which involves buying the cryptocurrency in the spot market against a short position in the futures market. The strategy seeks to make money from the difference between the futures and spot prices, also known as premium, which tends to evaporate as expiration nears. That way, a carry trade can pocket a relatively riskless return.
"I would assume it's mostly carry trades," said Vetle Lunde, an analyst at Arcane Research. "It's been growing in the last few weeks during the bullish price action, causing the basis premiums on CME to be significantly lower than the basis premiums on the offshore futures platforms."
The CME currently offers an annualized rolling three-month basis (futures premium) of nearly 3% versus 8.5% to 10% on other offshore exchanges such as Binance, FTX and OKEx. This premium represents the percentage difference between the futures price on a given exchange and the going spot-market rate for the cryptocurrency.
The existence of the premium means a trader could lock in a 3% annualized return by selling the quarterly futures contract on the CME and buying the cryptocurrency in the spot market, in a bet that the prices will eventually converge. Some traders borrow stablecoins to purchase bitcoin in the spot market, in which case the interest paid to the stablecoin lender would be subtracted from the net return.
Such carry trades have lost their shine over the past few months as the price crash in May crowded out excess leverage from the market. Notably, the sell-off below $40,000 seen on May 19 liquidated more than $8 billion worth of positions in the derivatives market.
Another factor could be that several big cryptocurrency exchanges including Binance, the world's largest exchange by volume, and FTX have recently cut their leverage limits to 20x (20 times a trader's money down) from 100x amid widespread criticism of leveraged trading.
"The trade is not yielding the same profits as earlier," Lunde said. “At its peak in the middle of April, the cash-and-carry trade yielded annualized returns of 20% in the front-month contract, in contrast to the current levels" fluctuating around 1% to 4%.
Bitcoin futures on Binance and other exchanges traded at a premium of 40% during the height of the bull run in mid-April.
According to Patrick Heusser, head of trading at Crypto Finance AG, the current yield is not attractive enough for funds to take carry trades.
"If you look at the absolute yield you can generate right now, I doubt that 'the carry trade' is back," Heusser said.
"Maybe some market makers or liquidity provider has changed or remodeled his flow concept," Heusser added. "Usually, the market makers on the CME are the same guys making markets on crypto native exchanges ... and some of these guys are labeled as leveraged funds."
Market makers are individuals or entities with a contractual obligation to maintain a healthy level of liquidity on an exchange. They ensure there is enough depth in the order book by offering to buy or sell when required and run a direction-neutral book. For instance, a market maker filling a short position in the futures market often takes a short or long position in the spot market or buys a call option.
In this case, per Heusser, the bitcoin market makers may be short on the CME and hedged on native exchanges. It also indicates "better buying interest from the investment side on the CME," he said.
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