‘Unprecedented scale’ of Wall Street’s favourite Bitcoin ETF trade is about to hit Ethereum

‘Unprecedented scale’ of Wall Street’s favourite Bitcoin ETF trade is about to hit Ethereum
CME saw a surge in open interest after Bitcoin ETFs were launched. Credit: Alf Ribeiro/Shutterstock
  • ETFs enabled institutional traders to deploy a market-neutral trading strategy on Bitcoin.
  • These institutions account for a good portion of the growing Bitcoin short interest on the CME.
  • Ethereum ETFs will likely create a similar opportunity for Ether.

Spot Bitcoin exchange-traded funds, which launched in the US in January, are boosting the popularity of an arbitrage strategy called the basis trade.

That’s according to analysts from CF Benchmarks, a firm that provides cryptocurrency pricing data to financial institutions like CME Group, the parent company of the Chicago Mercantile Exchange.

“The efficiency of these spot products, aligned with CF Benchmarks’ indices, has given traders the confidence to arbitrage away the basis out of the CME futures markets at an unprecedented scale,” Gabe Selby, head of research at CF Benchmarks, told DL News.

The basis trade is a so-called market-neutral strategy, meaning that traders don’t rely on prices going up or down to make a profit.

The trade involves taking advantage of the difference in price between an asset’s spot price and its futures price. Futures contracts allow traders to buy an asset at a determined price at a specified future date.

For institutional traders looking at crypto markets, that means arbitraging spot Bitcoin ETFs and Bitcoin futures on the CME — for example, by buying ETF shares and shorting an equal amount on the CME.

The Bitcoin ETFs gave financial institutions a highly liquid venue to deploy the basis trade without needing to deal with crypto-specific infrastructure, like exchanges or custody products.

The funds have contributed to an 80% increase in open interest — a metric that reflects the total number of futures contracts outstanding — on the CME Bitcoin futures market since January, according to CF Benchmarks.

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“This dynamic will likely lead to increased activity across the entire futures curve, including longer-dated tenors,” Selby said.

Short contracts increase

The basis trade is likely the reason behind a big increase in shorts, or bets that an asset’s price will fall.

According to CF Benchmarks research, there are just under 18,000 short contracts on the CME — worth about $6.3 billion.

That’s “way above the record prior to spot Bitcoin ETF approval in October 2021″ — around 6,200 short contracts — the research said.

CF Benchmarks research said that “the role of the basis trade to facilitate arbitrage and drive liquidity will likely intensify.”

The analysts also said that institutional traders will likely deploy the basis trade on Ethereum as well once the spot ETFs launch sometime this summer.

Crypto market movers

  • Bitcoin is down 5% in the last 24 hours, trading for $60,800.
  • Ethereum slumped 5.5% in the same period, at $3,270.

What we’re reading

Joanna Wright and Tom Carreras write about markets for DL News. Got a tip about Bitcoin ETFs? Reach out at joanna@dlnews.com or tcarreras@dlnews.com