Key Points
- Spot Bitcoin ETFs and CME Bitcoin futures are being used for basis trades, leading to a significant increase in open interest.
- This activity can influence Bitcoin liquidity and foster a more interconnected market ecosystem.
Institutional investors are significantly using spot Bitcoin exchange-traded funds (ETFs) and the CME Bitcoin futures market for basis trades. This activity has led to a sharp uptick in open interest.
Bitcoin ETFs Influence on CME Bitcoin Futures Market
According to Gabriel Selby, a lead research analyst, spot Bitcoin ETFs have contributed to an 80% rise in open interest on the CME Bitcoin futures market since the beginning of the year. Selby suggests that this institutional investor activity could enhance Bitcoin liquidity and lay the groundwork for a stronger, more interconnected market ecosystem.
Data reveals that there are currently just under 18,000 Bitcoin short contracts on the CME, equating to a notional value of approximately $6.3 billion. This figure significantly surpasses the previous record of roughly 6,200 short contracts prior to the approval of the spot Bitcoin ETF in October 2021. The increase is primarily attributed to basis trading, which leverages the alignment of price benchmarks between spot Bitcoin ETFs and CME futures contracts to create arbitrage opportunities.
The Impact of Basis Trading on Bitcoin Price
Arbitrage opportunities that arise from trading the difference between the spot and futures prices can exert pressure on the current Bitcoin spot price. When the Bitcoin futures price is above the spot price, purchasing in the spot market raises the spot price, while selling in the futures market reduces the futures price.
On the other hand, when the futures price is below the spot price, selling in the spot market decreases the spot price, while buying in the futures market boosts the futures price. Nonetheless, the influence of arbitrage activities on the spot price is typically short-term, as the spot and futures prices will converge over time.
The analyst stated that it’s difficult to pinpoint exactly how much spot Bitcoin ETF is being utilized in aggregate for the basis trade. “It will be within the ballpark of the $6 billion notional on the CME side,” the analyst noted.
