Hedge Funds' Record Ether Shorts Spark Debate on Bearish Bets

Hedge funds have amassed record short positions in ether (ETH) futures on the Chicago Mercantile Exchange (CME), sparking debate about the motivations behind these positions. While some market participants anticipate price declines, the primary driver behind the surge in short interest appears to be carry trades or arbitrage plays. However, a portion of these short futures trades may represent outright bearish bets on the cryptocurrency.

As of the week ended Feb. 4, hedge funds held a net short position of 11,341 contracts in the CME futures, according to data tracked by ZeroHedge and the Kobeissi Letter. This number has increased by 40% in one week and 500% since November, as reported by The Kobeissi Letter.

Thomas Erdösi, head of product at CF Benchmarks, suggests that a significant portion of the short interest in Ether futures is tied to the carry trade. Despite macro headwinds and Ether's relative underperformance, U.S. ETH ETF inflows have remained steady over the past three months, coinciding with an increase in futures short interest. This could signal an uptick in basis trades, where hedge funds short CME Ether Futures while simultaneously buying spot ether ETFs listed in the U.S.

Carry trades, also known as basis trades, seek to profit from price discrepancies between the two markets. In ETH's case, it involves hedge funds shorting the CME futures while buying spot ether ETFs. Erdosi notes that Ethereum's basis has occasionally exceeded Bitcoin's, making Ether carry trades more attractive.

While carry trades may be the primary driver behind the surge in short interest, some hedge funds may be taking outright bearish bets to hedge against downside risks in ether. Traders could be shorting ether futures as a hedge against long bets in the altcoin complex. However, not all hedge fund short interest is necessarily driven by basis trades, as some may be outright shorts given ETH's lagging performance against other programmable settlement chains like SOL and a broader rally in altcoins.

ETH options on both the CME and offshore giant Deribit show a bias for put options expiring in the near-term, indicating lingering downside fears in ether. Long-end ETH options, however, show pricier calls, suggesting bullish long-term expectations.