Hedge Funds Accumulate Record Short Bitcoin Positions, Reveals Data

According to recent data, leveraged funds, categorized by the Commodities Futures Trading Commission (CFTC) as hedge funds and commodity trading advisers, held their largest bearish positions on Bitcoin (BTC) at the close of the first quarter, coinciding with the cryptocurrency’s surge tapering near all-time highs. Specifically, hedge funds increased their net short positions in the Chicago Mercantile Exchange’s (CME) standard bitcoin futures contracts to 16,102 contracts, marking the highest level recorded since the inception of futures trading in late 2017, as revealed by CFTC statistics released last week. These standard bitcoin futures contracts on CME represent 5 BTC each. This surge in short positions aligns with a trading strategy where a trader sells futures contracts in anticipation of profiting from or hedging against an anticipated decline in the underlying asset’s value, known as a short futures position.

Markus Thielen, CEO of 10x Research, suggests that the surge in short positions indicates a resurgence of hedge funds’ interest in the carry trade, citing a substantial demand among hedge funds to engage in these trades despite Bitcoin’s recent 10% decline from its all-time high. He noted that the futures premium has remained in double digits, providing an attractive opportunity for hedge funds to capitalize on these high rates. Leveraged funds maintained record net shorts by the end of the first quarter, as reported by CME QuickStrike data. Despite Bitcoin’s bullish momentum stalling after reaching record highs above $73,500 in March, CME futures continue to trade at an annualized three-month premium of over 10%, indicating that carry trades still offer significantly higher returns compared to the 10-year Treasury note’s risk-free return of 4.36%. However, it’s possible that some hedge funds have opted for outright bearish bets amid recent positive U.S. economic data and hawkish statements from Federal Reserve officials, which have diminished expectations for immediate interest rate cuts. Federal Reserve Chairman Jerome Powell emphasized the importance of monitoring inflation developments in the coming months, contributing to uncertainty regarding the timing of the first rate cut. Following the release of optimistic manufacturing data on Monday, the likelihood of the Fed cutting rates in June has fallen below 50%.

Some analysts express doubt about whether the upcoming mining reward halving will fulfill its historically bullish expectations, as the reduction in the per-block BTC issuance from 6.25 BTC to 3.125 BTC, scheduled for later this month, has traditionally sparked significant bull runs in Bitcoin’s price within 12 to 18 months. However, David Duong, head of institutional research at Coinbase, highlights the challenges of drawing definitive conclusions due to the limited data pool and the market’s transformation following the introduction of spot exchange-traded funds (ETFs) in the U.S. Duong emphasizes the significant impact of these ETFs on Bitcoin’s market dynamics, suggesting that the response to the halving may diverge from past cycles. The launch of spot ETFs has propelled Bitcoin to new highs prior to the halving, creating the possibility of a subsequent price decline post-halving. JPMorgan analysts anticipate Bitcoin dropping to $42,000 after the halving excitement fades, with the cryptocurrency currently trading near $66,000.