CME refers to the Chicago Mercantile Exchange, which launched BTC futures trading at the end of 2017 with the code: [BTC1!]. Subsequently, a large amount of Wall Street institutional capital and professional traders entered the BTC market, dealing a heavy blow to the ongoing bull market, causing BTC to enter a 4-year bear market.

As more and more traditional funds enter the BTC market, institutional traders (hedge funds) and professional traders that CME mainly serves begin to participate more and more in BTC futures trading;

During this period, CME's futures open interest has been growing, and it successfully surpassed Binance last year to become the leader in the BTC futures market. As of now, CME's total BTC futures open interest has reached 150,800 BTC, equivalent to about 10 billion US dollars, accounting for 28.75% of the entire BTC futures trading market;

Therefore, it is no exaggeration to say that the current BTC futures market is not controlled by traditional cryptocurrency exchanges and retail investors, but has fallen into the hands of professional institutional traders in the United States.

As more and more people have discovered recently, CME's short positions have not only increased significantly, but have recently broken through a record high and are still rising. Currently, CME's short positions have reached 5.8 billion US dollars, and the trend has not shown a significant slowdown;

Does this mean that Wall Street’s elite capital is shorting BTC on a large scale and is completely pessimistic about the future performance of BTC in this bull market?

If we simply look at the data, this is indeed the case. Moreover, BTC has never experienced a situation where it has broken through a historical high in a bull market and then remained volatile for more than 3 months. All signs indicate that these big funds may be betting that this round of BTC bull market is far less than expected.

What impact does this have on the bull market?

First, if you frequently check CME prices, you will find an interesting feature: BTC1! The price of this futures trading pair is almost always at least several hundred dollars higher than the Coinbase spot price. This is easy to understand because CME's BTC futures are delivered on a monthly basis, which is equivalent to the swap contract of the month in traditional cryptocurrency exchanges.

Therefore, when market sentiment is bullish, we can see that swap contracts often have different degrees of premium. For example, the premium of the second quarter contract in a bull market is often very high.

If we subtract Coinbase’s spot price from CME’s BTC futures price (they are both USD trading pairs), we get the following chart:

The orange curve is the trend of BTC price at the 4h level, while the gray curve is the premium of CME futures price relative to CB spot price;

It can be clearly seen that the CME futures premium fluctuates regularly with the monthly contract rollover (automatically moving positions to the next month's contract), which is similar to the swap contract premium of traditional exchanges in the cryptocurrency circle. They will have a higher premium when the contract is generated, and when the contract is about to expire, the premium is gradually smoothed;

It is precisely because of this rule that we can carry out a certain degree of futures-spot arbitrage. For example, when the quarterly contract of the CEX exchange is generated, if the market has just experienced a period of bull market and its premium has reached 2-3%, then we can take out 2 million US dollars and buy 1 million US dollars of spot respectively, and open a 1 million US dollar short order on the quarterly contract at the same time;

During this period, no matter how the price fluctuates, the short position will hardly be liquidated. As long as the premium is gradually smoothed out before the expiration of the quarterly contract, a stable 2% return of 1 million US dollars, or 20,000 US dollars, can be obtained without risk.

Don’t underestimate this little bit of profit. For large funds, this is a high return with almost no risk!

To do a simple calculation, CME generates a new contract once a month on average. Starting from 2023, the average premium is 1.2%. Taking into account the transaction fee of this operation, let's calculate it as 1%. That means a fixed 1% risk-free arbitrage opportunity every month over the course of a year.

Calculated 12 times a year, the risk-free annualized return is about 12.7%, which is already higher than the yield of most money market funds in the United States, not to mention earning interest by depositing the money in a bank.

Therefore, at present, CME's futures contracts are a natural arbitrage venue, but there is still a problem. Futures can be opened on CME, but where can spot be bought?

CME serves professional institutions or large funds. These customers cannot open a CEX exchange account to trade like us. Most of their money also belongs to LP, so they must find a compliant and legal channel to purchase BTC spot.

At this point, BTC's spot ETF has completed a closed loop. Hedge funds or institutions make large purchases on US stock ETFs and open an equal amount of short orders on CME, making risk-free fixed arbitrage once a month to achieve a stable return of at least 12.7% annualized.

Therefore, based on the above incomplete data, we can draw the following research conclusions:

1. CME's huge short positions are likely to be used to hedge spot ETFs, so its actual net short position should be far less than the current $5.8 billion, and there is no need for us to panic because of this data;

2. ETFs have received a net inflow of $15.1 billion so far, and it is likely that a considerable portion of the funds are in a hedging state, which explains why the second highest single-day ETF net inflow in history (US$886 million) in early June and the ETF net inflow for the entire week did not lead to a significant breakthrough in the price of BTC;

3. Although CME's short positions are very high, they have already seen a significant increase before the ETF was approved. There was no significant liquidation during the subsequent bull market from $40,000 to $70,000. This shows that there is likely to be funds among US institutional investors that are firmly bearish on BTC, and we should not take it lightly;

4. We need to have a new understanding of the daily net inflow data of ETFs. The impact of net inflows on market prices may not necessarily be positively correlated, and there may also be a negative correlation (large purchases of ETFs lead to a drop in BTC prices);

5. Consider a special case. When the CME futures premium is eaten up by this group of arbitrage systems one day in the future and there is no potential arbitrage space, we will see a significant reduction in CME's short positions, corresponding to which is a large net outflow of ETFs. If this happens, don't panic too much. This is simply the withdrawal of liquidity from the BTC market to find new arbitrage opportunities.

It is really hard to play in the short term, but it is okay in the long term. The market is flat, and everyone is waiting for Bitcoin and Ethereum to choose a direction. So keep waiting. Only when you are determined to be in a bull market can you hold on. It is useless to distract your attention and watch the K-line every day. If complaining can make money, then everyone who complains every day is already rich. It is meaningless. Either clear the position and watch the bear market, or hold on and watch the bull market.

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