Bitcoin futures are experiencing a surge in net short interest, largely due to a market-neutral strategy known as the basis trade. This strategy aims to take advantage of pricing discrepancies between spot and futures markets and has contributed to a significant portion of short interest in around 18,000 CME Bitcoin futures contracts. The popularity of the basis trade has been observed through the short interest on CME BTC futures held by hedge funds, with over $7.5 billion in net short futures currently held. In comparison, the peak short position in 2021 was only $2 billion, indicating the growing interest in this strategy.
The basis trade has gained momentum in the cryptocurrency space following the introduction of spot Bitcoin exchange-traded funds (ETFs) in January. Traders can buy these ETFs and sell futures representing Bitcoin at higher prices, profiting from the price differences. The availability of ETFs has made it easier to execute this trade through regulated brokers, streamlining the cash-and-carry strategy in crypto markets. Hedge funds are taking record net short positions on Bitcoin, indicating a bearish outlook on BTC despite buying Spot ETFs. This is a commonly used position hedge for institutional investors managing billions of dollars.
While the surge in short interest aligns with a resurgence in demand for spot Bitcoin ETFs, it should not be assumed that the basis trade is the primary driver behind flows into the ETFs. The organic directional demand remains the key source behind the strong ETF flow, rather than traders motivated purely by futures premium arbitrage. The basis, which represents the difference between spot and futures prices, experienced higher levels from late November to mid-March, averaging around 20% annualized with a slight dip in February. Currently, the premium has ranged between 11% and 16% in recent weeks before declining to approximately 6% at present.
The popularity of the basis trade can complicate the interpretation of short-term ETF flow data when analyzing investor interest in the asset class. While Bitcoin ETFs have seen significant net inflows of $15.6 billion since their launch, they recorded outflows of $65 million on Monday. Net BTC ETF inflows are closely monitored daily, but they do not always represent organic demand for BTC. In the preceding week, BTC spot ETFs consistently experienced strong inflows, with a total net inflow of approximately $1.83 billion. The cumulative net inflow since the inception of these ETFs has now reached a record high of about $15.7 billion, indicating growing interest in the cryptocurrency asset class.
