Hedge Funds Hold Record Bearish Bitcoin Bets, Data Show

• Leveraged funds held record net short positions in CME's bitcoin futures last week, CFTC data show.
• Most funds may have taken short positions as a part of a "carry trade," one observer said.
• Some funds may be preparing for a post-halving price drop.

Leveraged funds, which the Commodities Futures Trading Commission (CFTC) describes as hedge funds and commodity trading advisers, held record bearish wagers on the bitcoin BTC$88.381,58 price at the end of the first quarter as the cryptocurrency's rally stalled near record highs.

Hedge funds boosted their net short positions in the Chicago Mercantile Exchange's (CME) standard bitcoin futures contracts to 16,102. That's the most since the futures began trading in late 2017, according to CFTC figures published last week. CME's standard bitcoin futures contracts are sized at 5 BTC.

A short futures position is a trading strategy in which a trader sells a futures contract to profit from or hedge against an expected drop in the underlying asset's price. Carry traders or arbitrageurs short futures while simultaneously buying the asset to safely pocket the price differential between the spot and futures market.

The record buildup in short positions likely reflects hedge funds' renewed interest in the carry trade, according to Markus Thielen, CEO of 10x Research.

"There is a massive demand from hedge funds to put on carry trades. Despite bitcoin’s -10% decline from the all-time high, the futures premium has remained in double digits, and hedge funds are taking advantage of these high rates," Thielen told CoinDesk in an interview.

While bitcoin's bullish momentum stalled after hitting record highs above $73,500 in March, CME futures continue to trade at an annualized three-month premium of over 10%, according to Velo Data. In other words, carry trades still yield at least twice as much as the 10-year Treasury note, which offered a so-called risk-free return of 4.36% at press time.

That said, some hedge funds may have taken outright bearish bets as recent robust U.S. economic data and hawkish comments from the Fed officials weakened the case for rapid-fire interest-rate cuts in the near term.

On Wednesday, Federal Reserve Chairman Jerome Powell emphasized the need to see how inflation evolves in the coming months, keeping the timing of the first-rate cut uncertain. Since the release of upbeat manufacturing data on Monday, the probability of the Fed cutting rates in June has dropped below 50%.

In addition, some observers are skeptical that the impending mining reward halving will live up to its bullish reputation.

The Bitcoin blockchain's fourth mining reward halving, due later this month, reduces the per-block amount of BTC issued as a reward to miners to 3.125 BTC from 6.25 BTC. Historically, bitcoin has chalked out major bull runs 12 to 18 months after halving, when the reduced per-block emission met demand.

If past data is a guide, the path of least resistance is higher. However, according to David Duong, head of institutional research at Coinbase, the small sample size makes it difficult to draw definite conclusions in a market fundamentally altered by the January debut of spot exchange-traded funds (ETFs) in the U.S.

"We believe that bitcoin’s market dynamics have fundamentally changed with the advent of U.S. spot BTC ETFs," Duong said in a market update last month. "Their multi-billion dollar net inflows in just two months have irrevocably altered the landscape. With major institutional players now capable of taking exposure through these vehicles, bitcoin's response to the upcoming halving may not necessarily mirror its performance in prior cycles."

"We think studies of previous cycles should be interpreted cautiously, as the small sample size makes it difficult to generalize patterns here," he said.

The launch of spot ETFs brought lifted bitcoin to record highs ahead of the halving, as opposed to previous cycles. That has left the door open for a post-halving price drop.

Analysts at JPMorgan foresee bitcoin falling to $42,000 after the halving hype subsides. At press time, bitcoin changed hands near $66,000.