New data from market analytics firm Kaiko Analytics shows hedge funds are net shorting Bitcoin (BTC) and Ethereum (ETH) on the Chicago Mercantile Exchange (CME).

In a new research paper, the crypto analytics platform says that while hedge funds are net short on both BTC and ETH on the CME, this does not mean the funds are bearish on crypto. They are more concerned with basic trades, a kind of arbitrage strategy.

Net short means that the hedge funds have built up more short positions than long positions in the crypto derivatives markets.

“This does not necessarily mean that these funds are bearish on crypto, it is more likely that they are engaged in one of the most popular trades in crypto, the basic trade.

The basic trade is a type of arbitrage strategy that exploits the price difference between two comparable assets. In this case between a BTC or ETH spot and futures. Hedge funds are probably ‘long basis’ at the moment. This means they sell futures short while holding spot BTC or ETH.

This protects against price fluctuations and guarantees a specific sales price in the event of volatility of the underlying asset. The long basis trade works best when prices are in a state of contango, meaning futures prices are above spot prices. The two prices will trend towards each other as the expiration date approaches.

While we don’t have the data to say for sure that this is why hedge funds are net short, it is the most likely explanation for the massive short positions held by these sophisticated traders, who would rarely go short without hedging.”

At the time of writing, Bitcoin is trading at $69,251, while ETH is worth $3,750.


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