As the bitcoin price attained a fresh 2019 high, hedge funds were stuck on the losing side of the bet by shorting BTC futures on the CME. | Source: Shutterstock
As speculative interest has returned to bitcoin futures markets, so too have short sellers. According to the most recent CFTC Commitment of Trader’s (COT) report, hedge funds may have been getting roasted by BTC/USD’s meteoric rise through $11,000.
A parabolic ascent is something that tends to attracts aggressive short-sellers, and the COT data for CME bitcoin futures seemingly confirms that reasoning. While individual traders overwhelmingly use the BTC derivatives market to go long, the bulk of large traders are positioned for a drop in bitcoin’s price, according to CFTC data. These traders are predominantly large hedge funds, which is why they control such a large share of the futures market.
There are some clear explanations as to why hedge funds might appear to have so much short exposure to bitcoin. The first is that there aren’t many other ways to short BTC. This would make CME positioning appear more bearish than overall market sentiment. Consolidated Trading Crypto Analyst L. Asher Corson told The Wall Street Journal:
“CME right now is providing a unique ability for the larger players to have massive short positions with very low counterparty risk.”
CME won’t have a monopoly on bitcoin futures for long, however, as several institutions are preparing to wade into the fray. LedgerX is in the headlines today, as its BTC derivatives platform won approval from regulators in another sign of goodwill from U.S. financial regulators toward crypto.
The second explanation would be that they are hedging exposure to any long bitcoin positions they currently hold. Such a tactic is common in volatile commodity markets but would typically be employed by commercial hedgers.
Looking at the historical data, it is clear that the short sellers are losing their conviction. On June 11, there were 47% more bearish positions than bullish, while the most recent data suggests just a 14% gap. Given that bitcoin has risen massively during this period, this is hardly surprising. Even the most bearish money manager would struggle to cope with being on the wrong side of a BTC/USD moon ride.
Nonetheless, it seems probable that hedge funds won’t be able to shake their addiction to shorting bitcoin any time soon. The downside in BTC/USD just looks too juicy.
Last modified: March 4, 2021 2:37 PM
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