The early hours of January 2 saw Bitcoin (BTC) futures on the Chicago Mercantile Exchange (CME) trading at $47,040, which was $1,600 higher than the spot markets. Traders are now questioning whether this spike was limited to CME futures and if it is a sign of an imminent rally in Bitcoin’s price.
Some analysts speculate that the premium in CME futures was caused by institutional investors anticipating the approval of a spot Bitcoin exchange-traded fund (ETF) by regulators, although the decision is still pending. Senior analysts at Bloomberg estimate that there is a 90% chance of ETF approval by the U.S. Securities and Exchange Commission (SEC), which explains why investors are feeling optimistic.
In healthy markets, monthly futures contracts typically trade with a 5% to 10% basis rate to account for longer settlement times. This situation, known as contango, is not unique to cryptocurrency derivatives. It is interesting to note that between January 2023 and November 2023, the CME Bitcoin futures had a very low premium compared to the BTC spot markets, with intraday highs rarely exceeding $350, equivalent to 14% in annualized terms.
However, this trend changed on November 24, 2023, when the premium surged to $900, the highest in over two years. It is worth mentioning that Bitcoin’s price had already risen by 41% to $37,750 in the 40 days prior. By December 6, 2023, the futures premium dropped to $530, even though Bitcoin’s price had risen to $43,800. So, in this case, investors’ optimism paid off, at least for those who held onto their positions for two weeks.
Now, let’s focus on the recent event on January 2, which was the unexpected surge in CME futures resulting in an intraday high of $47,095 for Bitcoin futures.
A user named @DumpWatcher on the X social network pointed out that this movement occurred before the traditional U.S. stock markets opened, suggesting a potential period of lower activity. However, this was not the case, as 4,180 BTC futures contracts were traded in the initial trading hours of 2024, equivalent to $945 million. But this bullishness was short-lived, as the $1,600 premium, equivalent to a 53% annualized rate, dropped to $500 throughout the day.
It is difficult to determine whether the premium was triggered by stop-loss orders from leveraged shorts (bearish bets), but it is unlikely, given that Bitcoin’s price only increased by 4.6% while the CME futures markets were closed since December 29, 2023. The main question to ask is whether this movement was solely limited to CME.
Data from various crypto exchanges, including Binance, Bybit, OKX, Deribit, showed a 32% annualized BTC futures premium on December 2, 2023, the highest level in over two years. However, it did not match the movement seen on CME, suggesting that the buying spree did not extend to the broader market. Such differences are common and can be attributed to variations in client profiles and the margin requirements of CME, which is 40% to 50%, while crypto exchanges offer up to 100x leverage.
To better gauge market sentiment, one should look at the Bitcoin options markets, specifically the 25% delta skew, which can confirm whether professional traders are leaning bearish. Typically, periods of excitement have a -7% skew, indicating that put (sell) options are trading at a discount compared to similar call (buy) options.
Since December 6, 2023, the BTC options market has maintained a relatively neutral stance in terms of pricing put and call options, even during the rally towards $45,910 on January 2, 2024. This data differs from the Bitcoin futures markets and casts doubt on the theory that institutional traders have insider information regarding the eventual approval of a spot ETF.
In conclusion, the spike in CME futures premiums does not reflect the broader market sentiment, which remains bullish but not unusually so, considering that Bitcoin’s price has reached its highest level since April 2022.
Please note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.