A rare pattern recently emerged in the Chicago Mercantile Exchange’s (CME) futures market tied to bitcoin (BTC) and ether (ETH), signaling a strong investor inclination to go long or take leveraged bullish bets on the leading cryptocurrencies.
A futures contract is a legal contract to buy or sell the underlying asset at a predetermined price at a specified future date, called the expiry date. Usually, futures markets are in contango, a term used to describe when the price of futures rises above spot, with further-out futures drawing higher than nearer-expiration futures. An increase in buying pressure often causes the contango to widen.
BTC and ETH futures have recently experienced the same, with the so-called “next-month” contract trading at a notable premium to the “front month” contract, a rare occurrence since 2018, according to data tracked by K33 Research. The front month contract has an expiration date closest to the current date, while the next in line is called the next month contract.
“It’s telling of a very bullish sentiment on CME with a strong desire to add long exposure, leading yields premiums to surge,” Vetle Lunde, senior analyst at K33 Research, told CoinDesk.
The CME futures in consideration are sized at five BTC and 50 ETH, respectively. As of writing, December expiry contracts could be called the front month contracts while those expiring in January represent the next month contracts. November contracts expired Monday.
The elevated next-month premium indicates bullish sentiment. (K33 Research) (K33 Research)
The rolling weekly spread between next and front month BTC and ETH contracts recently widened to an annualized 1.5%, the first such instance since the bull market days of early 2021.
The pattern has occurred only four times to date, with three of those seen during bull runs while one a couple of weeks before the coronavirus-induced crash of March 2020.
According to Lunde, contango in both markets slightly narrowed on Monday but continued to signal a bullish sentiment.
“Yesterday saw a considerable narrowing in the contango. 7,000 BTC worth of open interest was closed on the December contract, and for ETH, last week’s build-up to an all-time high notional open interest was erased after seeing a pattern similar to BTC,” Lunde said.
“Yields premiums remain well into the double digits, i.e., CME’s sentiment remains very bullish,” Lunde added.
Protocol’s co-founder Huf said that the recent widening of the contango stemmed from traditional market players taking bullish bets.
“It indicates TradFi has a long exposure but not via spot – it’s quite a vulnerable positioning – probably gets unwound on any spikes higher into a potential spot ETF approval,” Huf told CoinDesk.
Huf added that elevated futures premiums could see renewed interest in basis trades or cash and carry arbitrage. The strategy involves buying the cryptocurrency in the spot market and simultaneously selling futures. The strategy, one of the most preferred during the 2020-2021 bull run, allows traders to pocket the premium while bypassing price volatility.
