Omicron Risk Unlocks Profit For Retail Traders Shorting Bitcoin

The latest Traders Engagements (COT) report issued Monday night by the Commodity Futures Trading Commission (CFTC) for the week ending November 23 revealed a three-fold increase in the number of contracts. of short bitcoin futures held by retail investors compared to the previous week. . These holdings, called open interest, represent the capital held in the CME as collateral for long and short operations. Breaking the average number of short bitcoin futures held by retail traders (around 798 contracts as of last week), the COT report showed a 200% jump in short bitcoin contracts from 887 to 2663. The monetary equivalent of this small net increase is $ 511 million, and it should be noted that it did not come from micro bitcoin (MBT) futures trading, which is still nascent and 20 times smaller than the BTC futures market.

This dramatic change follows a temporary but equally sharp bullish move (long bitcoin) in the second half of October. Together, these moves suggest that perhaps wealthy retail investors - those who can buy the typical $ 300,000 CME bitcoin futures contract - may be starting to place speculative short-term bets in tandem to profit from short-term moves in the market. volatile cryptocurrency market. In recent weeks and months, the market for providing information on crypto trading has grown from trading platforms like LMAX Digital and Coinbase to some US banks with crypto research. equipment. Wealthy retail traders require specialized brokerage access to trade CME futures and this can be done through firms such as ADM, Stonex, thinkorswim (owned by Schwab) and also a small number of investment banks that have licensed wealthy clients to buy and sell CME. cryptocurrency futures.

One surprising development seen in CME's bitcoin futures market is the fluidity with which market participants assume and alleviate business risk. While retail traders are currently holding unusually short bitcoins, a small group (eight to ten) of asset managers active in CME futures have taken massive long positions in bitcoin futures in November, totaling more than 5,000 bitcoin futures contracts equal to $ 1.5 billion.

Thus, the long holdings of commercial and retail traders bitcoin futures seen in October amid the launch of the ProShares BITO bitcoin ETF, ushered in demand from asset managers who, in turn, received from Institutional clients who wanted a long Bitcoin position in their funds.

Commercial traders, who are companies and / or professionals with a deep understanding of the industry and the market generally hired to mitigate trading risk through the use of futures contracts, dramatically cut their long holdings of bitcoin futures to pre-BITO levels. , but they drastically increased their 'spread' contracts. which is the practice of maintaining long and short positions in the same contract to provide liquidity to those who need it. Separately and in recent weeks, this group of traders has built a large short position equivalent to $ 113 million in MBT futures contracts, making them the largest providers of short liquidity. Put another way, this group of traders went from facilitating liquidity for the big bitcoin ETF surge in October to now reverting to smaller exposure and selectively providing liquidity in new areas like MBTs.

Meanwhile, retail traders slyly adopted the short bitcoin futures position discussed above, betting that the price of bitcoin will possibly fall below the bitcoin level of $ 57,600 seen last week; bitcoin fell to a low of 53,200 on November 28 and that could have provided some of these retailers. traders a profitable exit from their short trades, which become profitable as the price of an asset decreases in value.

The big picture remains bright for bitcoin and cryptocurrencies in general as institutional demand continues to grow, with large asset managers like Vanguard and BlackRock allowing the funds they manage to invest approximately $ 3 billion each in crypto stocks. As of November 2021 and its rival Fidelity nearly doubles to 200. its institutional clients (hedge funds, family offices, registered investment advisers, pensions and corporate treasuries) using the company's bitcoin custody and execution services .

While the price of bitcoin has fallen 18% below its peak of $ 69,000 on Nov. 10, this has been due to strong macro headwinds such as rising inflation and the impact of the Omicron variant on the economy. global, and not because of weak demand for bitcoins. In fact, the sharp drop in crude oil prices (the price of Brent crude oil is down 20% or more since November 10) shows that Omicron's uncertainty is providing an organic break to inflationary forces. It will take weeks, if not months, for the world to regain confidence that it can defeat the Omicron variant, and in the meantime, it is sensible to expect lower expectations of global economic growth, lower inflation and a modest appreciation of risk assets such as the cryptocurrencies. For these reasons, astute investors will continue to view crude oil price action as an indicator of expected energy demand globally, but also as a guide to the short-term appreciation potential of bitcoin.