Enthusiasm for Bitcoin [BTC] basis trade is witnessing a significant upturn, where investors are engaging in buying spot BTC ETF and selling CME (Chicago Mercantile Exchange) futures contracts at elevated prices to capitalize on the price differential.
The basis trade premium, typically favored by hedge funds and asset managers, experienced a substantial increase in October. This uptrend coincided with BTC surpassing the $70K mark, as depicted by the Futures Annualized Rolling Basis metric.
After dwindling to 6.2% in mid-September, the premium surged to 12% by October 31st, marking a twofold rise within a short span.
The Impact of Fed Rate Cuts and Associated Ramifications
James Van Straten, an analyst specializing in BTC, hinted at a potential linkage between the surging BTC basis trade and the prevailing Fed rate cuts.
He suggested that the reduced interest rates have made BTC basis trade more appealing, offering superior returns compared to conventional investment avenues.
“This surpasses the current Fed Funds effective rate by over double (5%), especially with the prospect of further rate cuts by the Fed in the upcoming months. This could potentially lead to a significant uptick in the utilization of the ‘basis trade’ strategy.”
During the exhilarating market phase in March, coinciding with BTC’s record high of $73.7K, the premium reached 14%, alongside funding rates shooting above 30%.
In contrast to the existing metrics, it was highlighted by Mathew Sigel, the head of digital assets research at VanEck, that the current market sentiment lacks the exuberance seen during previous BTC peaks.
“Historically, BTC peaks have aligned with soaring perp premiums, a trend notably absent today. Moreover, current spot trading volumes are merely half of what they were in March/April, signaling significantly reduced panic buying by retail investors – a positive indicator for sustained market stability.”
Despite this, the overall BTC Open Interest (OI) surged to an all-time high of $43 billion, with CME futures accounting for $12.69 billion, showcasing a substantial interest from institutional players.
Nevertheless, analytics on CME Futures market positioning revealed that hedge funds were central to driving the widening basis trade premium.
Data from The Block indicates that hedge funds (represented by the blue line) maintained a net short position of $6.84 billion, suggesting extensive hedging against potential BTC price fluctuations.
Moreover, this widening premium gap between spot BTC and futures prices might attract even more participants into the market.
However, a sharp decline in the premium could be indicative of bearish sentiment and signal a potential pullback in BTC prices. Currently, BTC stands at $72.2K, marking a 13% appreciation throughout October.