The Chicago Mercantile Exchange Bitcoin (BTC) futures traded at $47,040 in the early hours of Jan. 2, $1,600 above the spot markets. Traders are now questioning whether the spike was limited to CME futures and if it signals an impending Bitcoin price rally.
Some analysts speculate that the premium 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 Bloomberg analysts estimate the odds of ETF approval by the U.S. Securities and Exchange Commission (SEC) at 90%, which explains part of investors’ recent optimism.
In healthy markets, monthly futures contracts typically trade with a 5% to 10% basis rate to account for longer settlement time. This situation, known as contango, is not unique to cryptocurrency derivatives. It’s worth noting that between January 2023 and November 2023, the CME Bitcoin futures had a very low premium relative to BTC spot markets, with intraday highs rarely exceeding $350, equivalent to 14% in annualized terms.
This trend changed on Nov. 24, 2023 when the CME Bitcoin futures premium surged to $900, the highest in over two years. Interestingly, Bitcoin’s price had already risen by 41% to $37,750 in the 40 days prior. More importantly, by Dec. 6, 2023 the futures premium had dropped to $530, even though Bitcoin’s price had risen to $43,800. In essence, investors’ optimism paid off in this case, at least for those who held on to their positions for two weeks.
This brings us to the more recent event on Jan. 2, the unexpected CME surge that resulted in a $47,095 intraday high for Bitcoin futures.
Bitcoin futures in sharp contango market with futures on CME trading far higher than crypto exchanges
CME trades higher on afterhours trading on thin volume as if someone knows something pic.twitter.com/l6Shwla2km
— Dump Watcher (@DumpWatcher) January 2, 2024
A post on the X social network by user @DumpWatcher notes that the movement occurred before the traditional U.S. stock markets opened, indicating 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. This bullishness did not last long, as the $1,600 premium, equivalent to a 53% annualized rate, dropped to $500 throughout the day.
It is impossible to determine if 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 Dec. 29, 2023. The primary question one should ask is whether the movement occurred solely on CME.
Data from Binance, Bybit, OKX, Deribit, and other crypto exchanges showed an annualized 32% BTC futures premium on Dec. 2, 2023, the highest level in over two years. However, it couldn’t match CME’s movement, suggesting that the buying spree did not extend to the broader market. Such differences are not uncommon and can be attributed to variations in client profiles and the 40% to 50% margin required by CME, while crypto exchanges offer up to 100x leverage.
One should look at the Bitcoin options markets to better gauge market sentiment, as the 25% delta skew can confirm whether professional traders are leaning bearish. In short, periods of excitement typically have a -7% skew as the put (sell) options trade at a discount relative to similar call (buy) instruments.
Since Dec. 6, 2023, the BTC options market has maintained a relatively neutral stance in terms of pricing put and call options, and the rally toward $45,910 on Jan. 2, 202 was no exception. This data differs from Bitcoin futures markets and casts doubt on the thesis of institutional traders having insider information regarding the eventual approval of a spot ETF.
Ultimately, the spike in CME futures premiums does not reflect the broader market sentiment, which remains bullish but not in a way that is unusual, considering that Bitcoin’s price reached its highest level since April 2022.
