According to new data provided by Kaiko Analytics, a market intelligence firm, hedge funds on the Chicago Mercantile Exchange (CME) have taken a net short position on Bitcoin (BTC) and Ethereum (ETH). However, Kaiko Analytics clarifies that this does not necessarily indicate a bearish sentiment towards cryptocurrencies. Instead, hedge funds are likely engaged in basis trades, which are a type of arbitrage strategy.

Being net short means that hedge funds have accumulated more short positions than long positions in the crypto derivatives markets. Kaiko Analytics explains that hedge funds are most likely involved in the basis trade, which exploits the price difference between two similar assets, in this case, BTC or ETH spot and futures. Currently, hedge funds are “long basis,” meaning they are selling futures short while holding spot BTC or ETH. This strategy offers protection against price movements and guarantees a specific sale price in the event of volatility in the underlying asset. The long basis trade is most effective when prices are in a state of contango, where futures prices are higher than spot prices. As the expiration date approaches, the two prices will converge.

Although there is no definitive data to confirm this, Kaiko Analytics suggests that the massive short positions held by hedge funds are likely due to their engagement in the basis trade. Sophisticated traders typically do not engage in short positions without hedging.