Bitcoin (BTC) futures are experiencing a surge in net short interest among leveraged funds, although this should not be mistaken for a bearish sentiment among hedge funds. Instead, experts suggest that the increase in short interest is primarily driven by the growing popularity of a market-neutral strategy known as the basis trade.

Spot Bitcoin ETFs Fuel Adoption Of Basis Trade Strategy?

The basis trade strategy aims to capitalize on discrepancies between spot and futures markets, and it is believed to account for a significant portion of the short interest observed in nearly 18,000 Chicago Mercantile Exchange (CME) Bitcoin futures contracts, according to Bloomberg. 

Ravi Doshi, the head of markets at prime broker FalconX, highlighted the popularity of the basis trade by pointing out that there is currently over $7.5 billion in net-short futures. In contrast, the peak short position in 2021 was only $2 billion.

The basis trade has gained traction in cryptocurrency since the introduction of spot-bitcoin exchange-traded funds (ETFs) in January. These ETFs have made it easier for traders to execute the basis trade, as they can buy the ETFs and sell futures representing Bitcoin at higher price levels, profiting from the price differentials.

While there is a rising short interest in futures, demand for spot Bitcoin ETFs has also rebounded, with these ETFs collectively holding over $61 billion in assets, according to Bloomberg data. 

However, Vetle Lunde, a senior analyst at K33 Research, cautions against attributing the popularity of the basis trade as the primary driver of flows into the ETFs. Lunde emphasizes that organic directional demand is the key source behind the strong ETF flow, rather than traders motivated solely by futures premium arbitrage.

Short-Term Data Reflects Dynamic Market Sentiment

The basis, representing the difference between spot and futures prices, was more significant from late November 2023 until mid-March 2024, averaging around 20% annualized, except for a brief decline in February. 

Since then, the premium has hovered between 11% and 16% in recent weeks before dipping to approximately 6%, according to Lunde.

Despite the significant popularity of the basis trade, it should be noted that short-term ETF flow data may not always be a reliable indicator of investor interest in the asset class. 

Although Bitcoin ETFs have witnessed $15.6 billion in net inflows since their launch in January, recent data shows outflows of $65 million on Monday. 

As the cryptocurrency market continues to evolve, the interplay between Bitcoin futures, spot ETFs, and the basis trade strategy provides valuable insights into the dynamics of investor behavior. 

The record short interest in Bitcoin futures, driven by the popularity of the basis trade, underscores the growing sophistication of trading strategies within the cryptocurrency ecosystem.

At the time of writing, the market’s leading cryptocurrency is trading at $66,270, indicating a 5% drop in price over the past 24 hours. The downtrend will likely continue, with the token’s last support before a potential retest of $65,000 at $66,300.

Featured image from Shutterstock, chart from TradingView.com