A distorted marketThe 3mth futures basis on CME has plunged to -7.2% over the last week, as CME futures trades at a record-high discount to spot, as elaborated in detail further below.
Offshore futures also trade below spot but at a far softer discount compared to CME futures.
Source: Skew, Laevitas, Tradingview, CME *Closed Saturday - Sunday
CME in major backwardationThe annualized futures basis on CME is exceptionally negative. To add to the negative flows on CME, we note that the futures term structure is in a state of extreme backwardation.
The December expiry has traded 1% lower than the front-month contract in the last few days, telling of a very bearish sentiment from institutional BTC traders. Never before has the next-month BTC contract on CME traded at such a substantial discount to the front-month contract.
ProShares’ short BTC ETF exposure at ATHThe short exposure of BITI has grown by 120% since November 7 and sits at an all-time high short exposure equivalent to 6,785 BTC, up from 3,065 BTC.
BITO has also experienced slight inflows, but far lower than the extent of the inflows to BITI. On November 9, ProShares’ daily aggregated net flow contribution reached -2,480 BTC. This is by far the most negative daily BTC flows seen in ProShares since the launch of U.S. BTC ETFs last year
Massive growth in open interest, non-ETF contribution surgesApart from ETFs, organic activity in CME’s BTC futures surged last week. Open interest has grown past 90,000 BTC, and the surge is far from caused by ETFs alone.
On November 3, ETFs accounted for 61% of the open interest on CME. Today, they account for 47%. This indicates that the surging open interest in CME is predominantly caused by organic, direct futures activity. Based on the extreme CME discounts and massive backwardation, it seems evident that the new vibrant activity on CME’s BTC futures is heavily oriented towards bearish positioning. Open interest on CME was equivalent to 93,565 BTC on Friday. This is the second-highest recorded open interest in CME's BTC futures ever, only behind the highs of 93,630 BTC following the launch of BITO on October 25, 2021.
Source: Coinglass, ProShares, Valkyrie, VanEck, CME Group
Source: Skew, Coinglass, CME Group
A deteriorated market structureBitcoin derivatives have not been similarly distressed since the aftermath of March 12, 2020. The charts above elaborate on the massively bearish positioning across all BTC-related instruments. To provide context, we illustrate the actual, unannualized discount of CME’s BTC futures versus the spot market below. CME’s November contract has traded at an extreme discount to spot in the last week. On average, CME traded 3% below spot in the last few days. These discounts are broader than what we saw in the days following the March 12, 2020, collapse in crypto markets, and CME’s futures currently trade at an all-time high discount to spot.
This is comparable to March 2020, as we see clear signs of abnormal bearish positioning. Still, in March 2020, contagion-induced uncertainty was less present. Equity correlation amid global uncertainty related to COVID was the directional market force. The current unique risks associated with contagion following FTX’s unforgivably massive balance sheet hole are the root of loads of uncertainty, likely to have long-term implications on the market, and it may take time for market conditions to normalize.
Institutions are back – But they are positioned extremely bearish
CME’s BTC futures saw its most active trading day in the last 13 months on November 8, as the markets tanked while absorbing the information that FTX was insolvent following the announcement of Binance’s non-binding LOI to acquire FTX. 48,554 contracts, equivalent to 242,770 BTC, changed hands on CME’s BTC futures on November 8, and volumes remained elevated in the days that followed. Open interest on CME surged massively from 68,000 BTC to 92,000 BTC amidst the high trading volume as institutional traders returned to the market. Institutional activity is again surging in BTC, but institutional traders are positioned for more downside. It will be very interesting to assess the Friday Commitment of Traders reports to better understand the traders behind this surging CME activity. This article is a part of the derivative section and the deep-dive section of our new market report: Ahead of the curve.
Source: Skew, CME Group