New data from market research firm Kaiko Analytics shows that hedge funds are net short of Bitcoin (BTC) and Ethereum (ETH) on the Chicago Mercantile Exchange (CME).
In a new research paper, the crypto analytics platform say that although hedge funds are net shorting both BTC and ETH on the CME, this does not mean the funds are bearish on crypto, but rather that they are engaging in basic trades, a type of arbitrage strategy.
Net short means that the hedge funds have built up more short positions than long positions in the crypto derivatives markets.
Says Kaiko Analytics,
“This does not necessarily mean that these funds are bearish on crypto, it is more likely that they are engaged in one of the most popular crypto trades: basic trading.
Basic trading is a type of arbitrage strategy that uses the price difference between two similar assets. In this case between a BTC or ETH spot and futures. Hedge funds are probably on a ‘long basis’ at the moment. This means they sell futures short while holding spot BTC or ETH.
This protects against price movements and guarantees a specific sales price in case of volatility in the underlying asset. The long basis trade works best when prices are in a state of contango, meaning futures prices are above spot prices. The two prices will move towards each other as the expiration date approaches.
While we don’t have the data to say with certainty that this is why hedge funds are net shorting, it is the most likely explanation for the massive short positions of these sophisticated traders, who would rarely go short without hedging.”
Bitcoin is trading at $69,251 at the time of writing, while ETH is worth $3,750.
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