Bitcoin’s bearish futures are signalling a slowdown into 2023

Bearish traders are signalling that crypto losses will continue into next year, as risk-averse firms scale back from a market roiled by the implosion of digital-assets exchange FTX.

The Bitcoin futures curve is stuck in backwardation, meaning its spot price is higher than its futures price. The CME Group’s January 2023 contract has dropped to its deepest discount to spot since its launch earlier in November and is stuck trading at more than 1 per cent below the cash price. Active Bitcoin futures on the CME group platform are all trading at a discount.

Contracts on Deribit, the most liquid crypto-native derivatives exchange, are also trading at discount with the January contract priced at $17,290 compared with Bitcoin’s cash price at around $17,300.

“It shows some strong bearishness in the market, with no expectations of good news anytime soon,” said Michael Safai, the chief executive of trading firm Dexterity Capital. “Traders are gearing up for a slow and unimpressive trading period, probably into the spring.”

The dislocation between spot and futures markets emerged on November 11, the day FTX filed for bankruptcy. It’s the longest period of backwardation on the Deribit exchange since July 2021, according to its chief commercial officer Luuk Strijers.

Futures prices moved largely in tandem before FTX’s collapse and occasionally traded at a premium to spot markets. Large inflows into futures-based ETFs meant that arbitrage traders could profit from buying front-month futures in the knowledge that demand from investment vehicles would push the prices of these contracts higher.

Bitcoin’s price has dropped 64 per cent since the beginning of the year, according to data compiled by Bloomberg.

In the wake of FTX’s unravelling and the disarray in its finances laid bare, trading firms have scaled down activities due to heightened concerns about counterparty risk. That’s exacerbated the dislocation between futures and cash prices as investors unwind trades.

“A whole bunch of people are flocking to the CME to short bitcoin,” said Stephane Ouellette, chief executive of FRNT Financial, an institutional crypto platform. “People are staying away from offshore exchanges and they are looking at platforms that are going to be around when the bets expire.”

Other investment vehicles focusing on Bitcoin are also signalling more downside. Shares in the largest holder of Bitcoin assets, the Grayscale Bitcoin Trust, hit a record discount in mid-November compared with the value of assets held and they’re currently trading at a 42.6 per cent discount to the trust’s holdings.

In another bearish signal, the ProShares Short Bitcoin ETF had its second-largest month of inflows in November since its launch with three consecutive weeks of inflows totaling $40.83m.

To arbitrage the current discount away, trading firms would need to buy CME futures and enter into short positions in other Bitcoin markets to hedge.

Such a strategy is extremely challenging due to the seizing up in lending and borrowing activity, according to Chris Zuehlke, partner at DRW and global head of Cumberland, a digital asset specialist. This leaves just those who hold cash Bitcoin to try and profit from the gap.

“Those who have their own inventory can and likely be putting it to use, but it appears that isn’t enough to collapse the basis,” Zuehlke said.