Bitcoin Net Shorts Reach Record $7.5 Billion Due to Rise of Popular Trade Strategy
Bitcoin futures have experienced a surge in net short interest, primarily driven by the increasing popularity of a market-neutral strategy called the basis trade.
The basis trade, which aims to take advantage of differences between spot and futures markets, is believed to make up a significant portion of the short interest in around 18,000 CME Bitcoin futures contracts.
“The rise of the basis trade can be seen through the short interest in CME BTC futures held by hedge funds. Currently, there are over $7.5 billion in net-short futures,” stated Ravi Doshi, the head of markets at prime broker FalconX, in an interview with Bloomberg.
Growing Popularity of Basis Trade Strategy in Crypto
The basis trade has become more popular in the cryptocurrency space following the introduction of spot Bitcoin exchange-traded funds (ETFs) in January.
Traders now have the opportunity to purchase these ETFs and sell futures representing Bitcoin at higher prices, profiting from the price differentials.
The availability of ETFs has made it easier to execute this trade, as it can be done through regulated brokers, simplifying what is known as a cash-and-carry strategy in crypto markets.
The increase in short interest in futures coincides with a resurgence in demand for spot Bitcoin ETFs, which collectively hold assets worth over $61 billion.
Despite the current popularity of the basis trade, it should not be seen as the main driver behind flows into the ETFs.
“The common belief that ETF flows are balanced by CME shorts is incorrect. The natural directional demand is the primary source driving the strong ETF flow, not traders looking to capitalize on futures premium arbitrage,” explained Vetle Lunde, a senior analyst at K33 Research.
The basis, which indicates the difference between spot and futures prices, was significantly higher from late November to mid-March, averaging around 20% annualized with a slight decrease in February.
Since then, the premium has ranged between 11% and 16% in recent weeks before dropping to approximately 6% currently.
Impact of Basis Trade on ETF Flow Landscape
Nevertheless, the rising popularity of the basis trade can complicate the analysis of short-term ETF flow data when evaluating investor interest in the asset class.
While the funds have seen significant net inflows of $15.6 billion since their launch in January, they experienced outflows of $65 million on Monday, according to data from Farside Investors.
“Daily scrutiny of net BTC ETF inflows does not always reflect genuine demand for BTC,” added FalconX’s Ravi Doshi.
During the previous week, BTC spot ETFs consistently saw strong inflows, with net inflows recorded on each trading day.
The total net inflow for the week amounted to approximately $1.83 billion, reaching demand levels not seen since early March, as noted by Matteo Greco, a research analyst at digital asset investment firm Fineqia International.
The cumulative net inflow since the inception of these ETFs has now reached a record high of about $15.7 billion.
