Record Short Positions in Ether Futures by Hedge Funds
Recent data reveals that hedge funds are holding unprecedented short positions in ether (ETH) futures trading on the Chicago Mercantile Exchange (CME), prompting a deeper analysis of the motivations behind these strategies. At first glance, the significant short interest could imply that seasoned market players are bracing for a downturn in prices, a notion actively discussed across various social media platforms. However, this interpretation may not fully encapsulate the situation; many of these short futures trades are primarily linked to carry trades or arbitrage opportunities, with some representing outright bearish sentiments on the cryptocurrency, according to market experts.
As of the week ending February 4, hedge funds maintained a net short position of 11,341 contracts in CME futures, as compiled by ZeroHedge and the Kobeissi Letter. This figure marks a staggering 40% increase within just one week and an alarming 500% surge since November, as highlighted by the Kobeissi Letter.
Thomas Erdösi, head of product at CF Benchmarks, noted, “There is evidence suggesting that a notable portion of the short interest in Ether futures is tied to the carry trade. Despite macroeconomic headwinds and Ether’s relative underperformance, U.S. ETH ETF inflows have remained steady over the past three months, which coincides with an increase in futures short interest—potentially indicating a rise in basis trades.” CF Benchmarks is known for providing the reference rates that underpin CME’s bitcoin (BTC) and ether derivatives.
Carry trades, also referred to as basis trades, aim to capitalize on price discrepancies between two markets. In the context of ETH, this strategy involves hedge funds shorting CME futures while simultaneously purchasing spot ether ETFs available in the U.S. Erdösi elaborated, “Hedge funds, in particular, seem to be actively engaging in this trade through regulated venues, specifically selling CME Ether Futures while buying ETHA [BlackRock’s iShares Ethereum Trust ETF]. Furthermore, Ethereum’s basis has occasionally surpassed that of Bitcoin, enhancing the appeal of Ether carry trades.”
He further explained that the recent surge in short interest translates to an increase of approximately $470 million, aligning closely with an inflow of around $480 million into spot ETFs. This correlation lends credence to the argument surrounding carry trades. However, it is also crucial to consider that a portion of the total short interest in CME futures might reflect outright bearish positions aimed at hedging against potential downside risks associated with ether.
According to Erdösi, “Traders might be shorting ether futures as a protective measure against long positions in the altcoin market.” Nonetheless, it is important to note that not all hedge fund short interest is necessarily driven by basis trades; some may be outright shorts, particularly in light of ETH’s underwhelming performance compared to other programmable settlement chains such as SOL and amid a broader altcoin rally.
Additionally, ETH options trading on both the CME and the offshore trading giant Deribit indicates a preference for put options set to expire in the near term, signaling persistent fears of a downturn in ether. A put option allows the buyer the right, but not the obligation, to sell the underlying asset at a predetermined price at a later date, representing a bearish outlook on the market. Conversely, purchasing call options indicates a bullish sentiment.
Long-term ETH options are showing a preference for pricier calls, suggesting a more optimistic outlook for the future. These dynamics illustrate the complex landscape of ether futures trading and the varied strategies employed by hedge funds in response to market conditions.
