Bitcoin futures have seen a notable increase in net short interest, mainly driven by the rising adoption of a market-neutral strategy termed the basis trade.
The basis trade, designed to exploit disparities between spot and futures markets, is likely responsible for a substantial portion of the short interest in around 18,000 CME Bitcoin futures contracts.
“The prevalence of the basis trade is evident in the short interest on CME BTC futures held by hedge funds. Currently, there is over $7.5 billion in net-short futures,” stated Ravi Doshi, head of markets at prime broker FalconX, to Bloomberg.
“In 2021, when BTC basis was considerably higher than its current level, the peak short position was only $2 billion.”
Basis Trade Strategy Gains Popularity in Crypto
Since the introduction of spot Bitcoin exchange-traded funds (ETFs) in January, the basis trade has gained momentum within the cryptocurrency realm. With these ETFs, traders have the opportunity to purchase them and sell Bitcoin futures at elevated prices, thereby capitalizing on the price differentials.
The advent of ETFs has streamlined the implementation of this strategy, as it can now be executed through regulated brokers, simplifying what is referred to as a cash-and-carry approach in crypto markets.
The uptick in short interest in futures corresponds with a renewed interest in spot Bitcoin ETFs, which collectively boast assets totaling over $61 billion.
While the basis trade currently enjoys popularity, it shouldn’t be misunderstood as the primary force driving flows into the ETFs.
“The common notion that ETF flows are counteracted by CME shorts is inaccurate. The organic directional demand is the primary driver behind the robust ETF flow, not traders driven solely by arbitraging the futures premium,” stated Vetle Lunde, a senior analyst at K33 Research.
The basis, which denotes the variance between spot and futures prices, experienced a significant increase from late November to mid-March, averaging around 20% annually with a slight dip in February.
However, in recent weeks, the premium has fluctuated between 11% and 16% before declining to approximately 6% at present.
Basis Trade to Complicate ETF Flow Landscape
However, the popularity of the basis trade can complicate the analysis of short-term ETF flow data when evaluating investor interest in the asset class.
Despite significant net inflows of $15.6 billion since their January launch, ETFs recorded outflows of $65 million on Monday, according to data from Farside Investors.
“Daily scrutiny of net BTC ETF inflows doesn’t always reflect organic demand for BTC,” adds FalconX’s Ravi Doshi.
In the previous week, BTC spot ETFs consistently experienced 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.