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Futures traders are jumping on the arrival of the first U.S. spot Bitcoin exchange-traded fund, stepping up lucrative bets on volatile movements in crypto-related prices.
The number of open Bitcoin futures contracts at Chicago’s CME Group rose to record levels in January as traders look to make short-term profits from the difference between these contracts and spot prices. This mimics a strategy that has been popular for many years in the more established financial industry. commodity market.
Thanks to its open interest marker, which shows the depth and liquidity of the futures market, CME has overtaken Binance to become the world’s largest exchange for trading Bitcoin derivatives. While Binance has thousands of retail customers, CME has traditionally catered to large asset managers, hedge funds and self-taught traders.
CME’s average open interest reached 24,100 contracts this month, worth about $4.6 billion, up from 16,500 contracts in 2023. By January 12, when U.S. regulators approved 10 new Bitcoins, the number had risen to 27,000 coins (about $6 billion). ETF.
CME traded an average of 66,000 Bitcoin futures contracts each day in January, up nearly 50% month-over-month and surpassing the all-time high set in November 2022.
Traders say they have increased trading volume by applying a proven strategy in other markets to Bitcoin, known as “cash-and-carry trading.”
Traders can hedge by selling futures and buying the underlying asset, which typically trades at a premium. Spot Bitcoin ETFs also offer traders a cheaper and safer way to buy cryptocurrencies. Typically, the two prices converge as a futures contract approaches expiration. Traders say the trade can generate annual returns of up to 15% with little risk.
“This is a simple carry trade, and we know this in Chicago,” said a longtime trader who declined to be named. “Bitcoin presents a real opportunity for traders who understand the forward curve, provide liquidity, and also understand how to take opportunistic positions.”
The highly publicized launch of these stock market funds investing directly in Bitcoin is expected to attract a new class of institutional investors to the world’s most traded cryptocurrency, further pushing its price higher. Ta. In fact, Bitcoin has fallen significantly since its approval two weeks ago.
However, the increased interest in futures indicates the participation of a class of traders who are less concerned with the direction of the overall market and are instead focused on arbitrage opportunities between Bitcoin and its various derivatives. ing.
“Essentially, this surge in activity reflects an unprecedented development in the market, with substantial demand for Bitcoin exposure among institutional investors,” crypto derivatives trading research group Amber Data said in a report last week. It shows that there is.”
Nikolaos Panigirtzoglou, an analyst at JPMorgan, said the arrival of a spot Bitcoin ETF is “likely to trigger significant changes in the structure of the Bitcoin market.”
He pointed out that onshore crypto exchanges and CME are benefiting from US regulators’ crackdown on offshore exchanges like Binance. This change “reflects the price discovery that is happening in the traditional financial system, especially in stocks where ETFs are more prevalent,” he said.
Derivatives traders are also linking more strategies to new Bitcoin ETFs, especially in the untapped options market where you can bet on price movements.
“The most exciting aspect of the Spot Bitcoin ETF is its potential to significantly expand the nascent crypto volatility market,” Amberdata said.