Hedge funds have accumulated record short positions in Ether (ETH) futures trading on the Chicago Mercantile Exchange (CME), prompting speculation about their motivations. While the data may initially suggest an overwhelmingly bearish outlook on ETH, deeper analysis reveals that a significant portion of these trades stem from carry trades or arbitrage strategies.
Surge in Short Positions
As of the week ending February 4, hedge funds held a net short position of 11,341 contracts in CME Ether futures, according to data tracked by ZeroHedge and The Kobeissi Letter. This marks a 40% increase in just one week and a staggering 500% rise since November.
While some traders interpret this surge as a sign of negative sentiment towards ETH, industry experts highlight that much of the short interest is tied to basis trading. Thomas Erdösi, head of product at CF Benchmarks, explains that despite macroeconomic headwinds and Ether’s relative underperformance, U.S. ETH ETF inflows have remained steady, coinciding with an uptick in futures short interest—potentially signaling an increase in basis trades.
Carry Trades Driving Short Interest
Carry trades, or basis trades, take advantage of price discrepancies between futures and spot markets. In ETH’s case, hedge funds engage in this strategy by shorting CME futures while buying spot ETH ETFs listed in the U.S.
“Hedge funds, in particular, appear to be active in this trade through regulated venues, in this case selling CME Ether Futures while buying ETHA [BlackRock’s iShares Ethereum Trust ETF],” Erdösi noted. He also pointed out that Ethereum’s futures basis has occasionally exceeded Bitcoin’s, making Ether carry trades more attractive.
According to Erdösi, short interest has surged by approximately $470 million recently, aligning closely with inflows of around $480 million into spot ETFs, further validating the basis trade argument.
Potential Bearish Bets Still in Play
Despite the prominence of arbitrage strategies, some short futures positions do represent outright bearish bets on ETH. Traders may be shorting Ether futures as a hedge against long positions in the broader altcoin market.
“Not all hedge fund short interest is necessarily driven by basis trades—some may be outright shorts given ETH’s lagging performance, particularly against other programmable settlement chains like SOL and a broader rally in altcoins,” Erdösi added.
While the record short positions in CME Ether futures may initially appear to signal an overwhelmingly bearish outlook, much of the activity is driven by sophisticated trading strategies such as basis trades. However, with ETH underperforming compared to other altcoins, some of these short positions could still be hedging against downside risks. As the market continues to evolve, monitoring the interplay between futures positioning and ETF inflows will be crucial in assessing Ethereum’s price trajectory.
