By Alexander Osipovich
Hedge funds and other big traders are betting that bitcoin will
fall, even as the digital currency has risen above $10,000 on a new
wave of crypto-optimism.
That is the picture that emerges from bitcoin futures listed on
CME Group Inc., the biggest U.S. exchange operator. Futures are
contracts that let traders bet on whether an asset -- in this case,
bitcoin -- will rise or fall.
Hedge funds and other money managers held about 14% more bearish
"short" positions in CME bitcoin futures last week than they did
bullish "long" positions, according to a recent Commodity Futures
Trading Commission report.
Other large traders were even more bearish. "Other reportables"
-- a loose category of firms that don't necessarily manage money
for outside investors -- held more than three times as many short
positions in bitcoin futures as long ones, the CFTC report
shows.
So who is the optimist? The report shows it is mostly small
investors taking the other side of the trade. Among traders with
fewer than 25 bitcoin contracts, a category that likely captures
many individuals placing bets in bitcoin, long wagers outnumbered
short bets by 4 to 1.
"Traditional market participants may be more skeptical of
[bitcoin] than millennial day traders," said George Michalopoulos,
a portfolio manager with Chicago fund manager Typhon Capital
Management LLC, although he stressed that his views were
speculative and that it is hard to know what is driving the CFTC's
numbers.
The CFTC report, which came out Friday, reflected the
positioning of market players on June 18, when one bitcoin could
buy around $9,000. The cryptocurrency was trading at about $10,900
late Monday afternoon.
Though it comes with a lag, the weekly CFTC report offers a
glimpse into how various types of traders are positioned in bitcoin
futures. Commodity traders closely follow similar CFTC reports on
futures like crude oil, wheat and corn for hints of what is driving
the market.
The CFTC data shows that hedge funds have been short bitcoin
since February, though they recently pared their bearish bets. On
June 11, short bets among hedge funds outweighed long bets by 47%,
a gap that narrowed to 14% the following week.
Such data don't necessarily mean hedge funds are placing
outright bets that bitcoin will drop. The short bets could also be
part of hedging strategies: for instance, a fund with a portfolio
of bitcoins might go short at CME as insurance against the value of
bitcoin dropping.
Trading activity has grown in CME's bitcoin futures in recent
months, along with the rebound in bitcoin's price. In May, average
daily trading volume in the CME contract hit a record $515 million,
the exchange operator says.
L. Asher Corson, a cryptocurrency analyst at Chicago proprietary
trading firm Consolidated Trading, said traders who want to short
bitcoin don't have many choices besides CME.
One option is for them to borrow bitcoins from another trading
firm, sell them and return an equivalent amount of bitcoins to that
firm later -- a process similar to how short selling works in
stocks. But the difference is that, in the volatile bitcoin market,
few firms are willing to offer that service to short sellers
because of the risk of their customers defaulting, Mr. Corson
said.
"CME right now is providing a unique ability for the larger
players to have massive short positions with very low counterparty
risk," Mr. Corson said.
Volumes in CME's bitcoin futures contract got a lift when a
competing U.S. exchange operator that offered a similar contract,
Cboe Global Markets Inc., recently discontinued it. Cboe's last
bitcoin futures contract expired last week.
But CME is set to face additional competition soon.
Intercontinental Exchange Inc., owner of the New York Stock
Exchange, is set to begin testing of a new bitcoin futures contract
in July. LedgerX, a startup trading platform for bitcoin options,
plans to launch its own futures on the cryptocurrency after the
CFTC said Tuesday it had won approval to become a futures exchange.
And a group of prominent financial firms, including TD Ameritrade
Holding Corp. and Fidelity Investments, are backing a venture
called ErisX, which plans to offer both futures and spot trading of
cryptocurrencies.
Volumes in CME's contract remain a fraction of the billions of
dollars' worth of daily activity in the bitcoin "spot" market,
where actual units of the digital currency change hands. But some
recent studies suggest that the size of the bitcoin spot market is
inflated because of rampant fake trading at cryptocurrency
exchanges.
That should prompt traders to take a closer look at CME bitcoin
futures, analysts from JPMorgan Chase & Co. said in a June 14
report. As a regulated exchange, CME bars wash trading -- in which
traders engage in back-and-forth buying and selling to generate
fake volume -- and violators can be subject to both CME and CFTC
fines. That makes CME's volumes more trustworthy.
"The importance of the listed futures market has been
significantly understated," the JPMorgan analysts wrote.
To receive our Markets newsletter every morning in your inbox,
click here.
Write to Alexander Osipovich at
alexander.osipovich@dowjones.com
(END) Dow Jones Newswires
June 25, 2019 11:40 ET (15:40 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
CME (NASDAQ:CME)
Historical Stock Chart
From Aug 2024 to Sep 2024
CME (NASDAQ:CME)
Historical Stock Chart
From Sep 2023 to Sep 2024