Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The launch of the first US spot bitcoin exchange traded funds has caught the attention of futures traders who are capitalizing on the volatile movements in crypto-related prices. The number of open bitcoin futures contracts at Chicago’s CME Group has reached record levels in January as traders aim for a short-term return from the price difference between these contracts and the spot price. This mirrors a popular strategy in more established financial and commodity markets.The recorded open interest, which indicates the depth and liquidity of a futures market, has positioned CME as the world’s largest exchange for trading bitcoin derivatives, surpassing Binance. Although Binance has a vast number of retail customers, CME typically serves major asset managers, hedge funds, and proprietary traders. The average open interest at CME has risen to 24,100 contracts this month, equivalent to about $4.6bn, up from 16,500 contracts for 2023. It peaked at 27,000 contracts, around $6bn, on January 12, the day US regulators approved the 10 new bitcoin ETFs.In January, there was an average daily turnover of 66,000 bitcoin futures contracts at CME, representing an almost 50 per cent increase from the previous month and surpassing the previous peak in November 2022. Traders attribute this surge in volume to the application of a proven strategy in other markets, known as a “cash and carry trade”, to bitcoin. This strategy involves a trader selling the future, typically traded at a premium, and hedging it by purchasing the underlying asset. Additionally, a spot bitcoin ETF provides traders with a more cost-effective and safer method to acquire the cryptocurrency. Typically, the two prices converge as the futures contract approaches expiry. Traders maintain that this trade generates up to a 15 per cent annualized return with minimal risk.“It’s a simple carry trade and we know this stuff in Chicago,” said a seasoned trader who chose to remain anonymous. “Bitcoin presents a real opportunity for traders that understand forward curves to come in and provide liquidity and also take opportunistic positions.” The much-anticipated introduction of stock market funds that directly invest in bitcoin was expected to attract a new group of institutional investors to the most-traded cryptocurrency globally, consequently boosting its price. Instead, bitcoin has sharply declined since the approval two weeks ago. However, the increased interest in futures indicates the involvement of a group of traders less concerned about the overall market direction and more focused on arbitrage opportunities between bitcoin and its various derivatives.
“In essence, this surge in activity indicates a substantial demand for Bitcoin exposure among institutional investors, an unprecedented development in the market,” said Amberdata, a crypto derivatives trading research group, in a report last week. Nikolaos Panigirtzoglou, an analyst at JPMorgan, stated that the arrival of spot bitcoin ETF was “likely to induce a significant change in the bitcoin market structure.” He pointed out that US regulators’ crackdown on offshore exchanges like Binance has resulted in onshore crypto exchanges and the CME benefiting. This shift “echoes the price discovery that is taking place in the traditional financial system, in particular in equities where ETFs are more prevalent,” he said. Derivatives traders are increasingly aligning their strategies with the new bitcoin ETFs, especially in the underdeveloped options markets, which allow betting on price swings.”The most exciting aspect of a spot Bitcoin ETF lies in its potential to significantly expand the nascent crypto volatility market,” Amberdata said.
