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Gap between futures and spot markets prices widens, hiking up CME leveraged funds

Gap between futures and spot markets prices widens, hiking up CME leveraged funds

Last updated 11th Aug 2022
Disclosure

Leveraged fund bets against Bitcoin reached record highs on the Chicago Mercantile Exchange (CME) last week, looking to make gains from the widening gap between futures and spot markets prices, CoinDesk wrote. According to the latest report by the Commodity Futures Trading Commission (CFTC), leveraged funds held a net short position of 31,000 contracts throughout the past week, which is 6,000 more than the previous week.

Bearish bias here to stay?

Did these traders favor a bearish trend? Not necessarily. One can raise short positions in the futures market while buying crypto in the spot market at the same time, bringing about what’s known as a carry trade. Also referred to as cash and carry arbitrage, carry trade is a market-neutral strategy that exploits inefficiencies in the spot and the futures market.

Carry trading combines a short futures position and a long position in the spot market when the current spot prices of an underlying asset are higher than the future prices. As one approaches expiration, the premium disappears. The spot market price and the futures price converge on the day of the settlement, yielding almost risk-free returns. 

Annualized premium rises from 1% to 20% before first Bitcoin ETF launch

Prior to the launch of ProShares’ Bitcoin ETF fund last week, the annualized premium in the front-month bitcoin futures contracts grew from 1% to 20%. It was last seen at 13%. Before dropping to just under 12%, the three-month rolling premium grew from 3% to 16%.

ProShares enjoys stronger start than Valkyrie

ProShares’ ETF enjoyed a powerful debut on NYSE last Tuesday. Like the second Bitcoin ETF to gain SEC approval, Valkyrie, ProShares invests in futures contracts. Valkyrie’s futures-based ETF debuted on Friday last week. It went live on NASDAQ when stock markets opened at 9:30 a.m. ET on the last business day of the week.

Quick losses observed Friday

The stock had lost 4% from its initial price after just several hours of trading, exchanging at $24.01. This seemed to reflect the decline in Bitcoin’s price, which had dropped to just over $60,000 on Friday, losing value for the second day in a row. By the end of trading, Valkyrie shares had rebounded to $25 per share.

ProShares’ ETF also lost value on Friday, dropping to $39.04 a share. Analysts predicted a renewed interest in carry trade and an upward trend in futures premiums earlier this month.

Daniela Kirova

Daniela Kirova

Daniela is a writer at Bankless Times, covering the latest news on the cryptocurrency market and blockchain industry. She has over 15 years of experience as a writer, having ghostwritten for several online publications in the financial sector.