A resurgent bitcoin broke $50,000 on Tuesday for the first time since early September, and $55,000 this morning. The bullish crypto sentiment reflects, in part, statements coming out of Washington D.C., from SEC Gary Gensler and Fed Chair Jerome Powell disavowing a ban on bitcoin, and the usual trend of a dramatic price breakouts following periods of low volatility. Additionally, for the time being, bitcoin appears to have shaken off concerns about Fed tightening and more crackdowns from China.
Now, based on recent trading data from the Chicago Mercantile Exchange, it appears hungry for much more. After finally escaping the mid-$40,000s, bitcoin appears set to challenge $60,000 before (possibly) gunning for $64,900, its mid-April record high in the coming weeks. Should this rally come to fruition, it would represent a price boost of 25% from today’s prices. Here are four bullish takeaways from the latest CFTC Commitments of Traders data.
1. BTC Futures Open Interest Is Growing
Positive growth in open interest (OI), though not necessarily a driver of price increases, tends to be positively correlated with them. To illustrate, 2020 was a banner year for CME BTC futures with OI rising 97% and bitcoin price going up by 280%. This year, bitcoin price is up 83% but BTC futures OI is down 17%. However, that appears to be changing. CME BTC OI has been a recent tear, rising 33% from Sep 7 to Oct 5 – most of it in the past week.
2. Corporations Supercharge Long Positions
Second, the commercial sector – generally made up of corporate hedgers with deep industry insight and a more conservative stance – has accelerated its purchasing of BTC futures. As a group, corporations now hold a net position equivalent to slightly more than 10,000 bitcoins, with a value north of $620 million as of Oct 5, up 75% in the last two weeks. We should note that these commercial buyers are few in number – 10 large firms according to CFTC records (for more detailed information on market participants please see the appendix) – but this is still meaningful because their concentrated and substantial market footprint more than compensates the relatively small numbers.
This dynamic also suggests that commercial traders are betting that the worst of a BTC price downturn is over. Since corporations own bitcoin long term, they are likely to defend the price at which they get into the trade (e.g., somewhere above $40,000) which translates to bad news for BTC sellers.
We don’t know these firms’ identities, but they can fall under a couple of buckets. There are dozens of publicly-traded companies with bitcoin on their balance sheet that may look for other ways to profit from the asset. Additionally, some of these firms could be newer adopters that want price exposure without having to handle or custody the asset.
3. Hedge Funds Going Short Is Not Necessarily Bearish For Bitcoin
Of course, there are two sides to every trade, so the increased long exposure from corporates is being offset at the CME by growing short positions from leveraged firms. However, this is not the entire picture. In scenarios like this hedge funds often use short positions to hedge against long exposure elsewhere, such as in the spot market. There are as many as two dozen hedge funds and CTA firms with the sophistication to sustain short BTC positions over time by buying bitcoin in the spot market and selling it in the futures in order to create liquidity in the latter and earn a spread in the process.
For instance, in the foreign exchange market key players such as XTX Markets and Citadel Securities, toggle the spot and futures markets to provide liquidity to EUR-USD price takers while hedging these positions using CME-EUR futures. These price takers could be retail brokerage firms or tier-2 banks. The CME futures market has traditionally been one of the main places where participants can quickly discover the latest price anonymously. This anonymous, electronic market access lets tech-savvy market participants, many based out of Chicago, have the ability to run a trading business where at least one side of their trading activity (the futures side) is predictable and useful to offset spot trading risks.
4. Commercial Traders Seen Boosting Both BTC and ETH futures Exposure
Aside from increasing their long bitcoin exposure, corporates are adding a growing degree of diversification to their portfolios by increasing their positions in CME ether futures. Since May commercial traders decreased their bitcoin futures holdings to add ether futures, but now they are boosting back bitcoin futures while holding ETH futures roughly unchanged from early September at just over 1,400 contracts. This boost in bitcoin weights dovetails other signs of growing institutional interest in altcoins, such as institutional investment flows into ETP products.
The world of CME crypto futures market participants has two major groups, those that are required to report their positions and the rest, which are primarily a few thousand wealthy retail traders holding one BTC futures contract or more – each contract is worth 5 BTC making the contract price range between $200,000 to $300,000 depending on price of bitcoin. The reporting group has anywhere between 70 to 110 firms, of which the largest group are hedge funds with an average of 56 firms.
Since bitcoin peaked in mid-April, the number of large market participants fell considerably in two groups: hedge funds and commercial traders holding long bitcoin positions. The absence of these long BTC market participants has zapped dynamism in futures activity. The groups that have experienced a net increase in market participants are hedge funds selling bitcoin (+10 firms) and asset managers buying BTC (+4 firms).
A key takeaway here is that the commercial traders we discussed earlier who are boosting bitcoin futures positions are relatively few in number – about 10 firms – and that a respectable number of them bowed out of holding bitcoin. While this exit may have been by the change in fortune for bitcoin, it could also be associated with how publicly listed firms have to account for crypto holdings in their balance sheet – i.e., as MicroStrategy CEO Michael Saylor will probably attest, it ain’t a walk in the park.