Spot ETF basis trades driving 80% surge in CME bitcoin futures open interest, analyst says
Quick Take
- Spot bitcoin ETFs have contributed to an 80% increase in open interest on the CME bitcoin futures market since their launch earlier this year, an analyst said.
- The increase in open interest can be attributed to basis trading between spot bitcoin ETFs and CME futures contracts to facilitate arbitrage opportunities, the analyst added.
Institutional investors are using spot bitcoin exchange-traded funds (ETFs) and the CME bitcoin futures market for basis trades, causing a sharp increase in open interest.
"Spot bitcoin ETFs have contributed to an 80% increase in open interest on the CME bitcoin futures market year-to-date," CF Benchmarks lead research analyst Gabriel Selby told The Block.
Selby added that this institutional investor activity could drive bitcoin liquidity and "set the stage for a more robust and interconnected market ecosystem."
Record number of futures contracts on CME after spot ETF approval
CF Benchmarks data show there are currently just under 18,000 bitcoin short contracts on the CME (at a notional of around $6.3 billion). "This is way above the record prior to spot bitcoin ETF approval in October 2021 of approximately 6,200 short contracts," Selby said.
Record number of bitcoin short contracts on the CME after spot bitcoin ETF approval. Image: CF Benchmarks.
Selby attributed this increase to basis trading that uses the alignment of price benchmarks between spot bitcoin ETFs and CME futures contracts to facilitate arbitrage opportunities.
Basis trading pressure on spot bitcoin price
The arbitrage opportunities between trading the difference between the spot and futures price can put pressure on the current bitcoin spot price. When the bitcoin futures price is higher than the spot price, buying in the spot market increases the spot price, while selling in the futures market decreases the futures price.
Conversely, when the futures price is lower than the spot price, selling in the spot market decreases the spot price, while buying in the futures market increases the futures price.
However, arbitrage activities typically have a short-term impact on the spot price, as the spot and futures prices will converge over time.
The CF Benchmarks analyst said that it is hard to say with certainty exactly how much spot bitcoin ETF is being used in the aggregate for the basis trade. "While it will be within the ball park of the $6 billion notional on the CME side," the analyst said.
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