Key Insights
- ETH CME futures are heavily skewed towards short positions.
- Hedge funds primarily engage in “carry trades”.
- A portion of these trades represents direct bearish outlooks on ether.
Overview
Hedge funds have reached an all-time high in short positions for ether (ETH) futures on the CME, prompting analysis of their strategies. Initially, the data may signal that market experts predict price declines. However, the situation is more nuanced; the surge in short positions is primarily attributed to carry trades, supplemented by some outright bearish forecasts on the cryptocurrency.
As of early February, hedge funds had amassed a net short position of 11,341 contracts on CME futures, marking a 40% increase within a week and 500% growth since November, according to ZeroHedge and the Kobeissi Letter.
“There is evidence suggesting that a notable portion of the short interest in Ether futures is tied to the carry trade. Despite macro headwinds, U.S. ETH ETF inflows have remained steady.”
— Thomas Erdösi
Carry trades focus on exploiting price disparities across markets. In this instance, hedge funds are shorting CME futures while simultaneously purchasing spot ether ETFs offered in the U.S. Additionally, the attractiveness of Ethereum’s basis relative to Bitcoin has been notable, creating favorable conditions for these trades.
The sharp uptick in short interest correlates with an increase of about $470 million in leverage and approximately $480 million in spot ETF inflows, reinforcing this narrative.
Despite the prevalent carry trade activity, some short positions may bet on declines in ether amid its underperformance compared to other cryptocurrencies like Solana (SOL).
Options Analysis
The options market for ETH on both CME and Deribit exhibits a leaning toward put options nearing expiration, underscoring ongoing apprehension regarding potential price drops in ether. This indicates a bearish sentiment among traders, while the demand for longer-term calls suggests some bullish long-term expectations.
This situation serves as a critical reminder of market dynamics and the complexities behind trading decisions.
