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Bitcoin Futures Demand Cools as Spot ETF Era Concludes Key Arb Trade

The 10 spot Bitcoin ETFs began trading on Jan. 11.

(Bloomberg) -- Demand for Bitcoin futures has eased following the US debut of exchange-traded funds that directly hold the largest digital asset, an initial indication of how the products can impact crypto trading trends.

Outstanding contracts — or open interest — for CME Group Bitcoin futures dropped some 24% to 20,679 by Jan. 30 after the 10 spot ETFs began trading three weeks ago, data compiled by Bloomberg show. Open interest had been at a record in the wake of Bitcoin’s 157% surge last year in anticipation of the ETFs.

CME derivatives gained popularity in part because they offer a regulated venue for Bitcoin exposure, a role the spot ETFs can now fill too. The futures were also used in a key arbitrage play involving the $21 billion Grayscale Bitcoin Trust, or GBTC, but that trade has run its course, crypto asset manager DACM said.

Investors switching to the US ETFs, and Bitcoin’s cooling rally, might lead to some “reduction in activity” in CME Bitcoin futures but they remain highly liquid linchpins of the crypto market, said Vetle Lunde, a senior analyst at K33 Research. He flagged their potential role as a hedging tool for the authorized participants managing the creation and redemption of the ETF units.

The spot Bitcoin ETFs that began trading on Jan. 11 include new products from heavyweights such as BlackRock Inc. and Fidelity Investments. The more than decade-old Grayscale fund, the largest Bitcoin portfolio, also went live as an ETF after switching from a closed-end format.

Shares in the Grayscale vehicle fell to a discount to the portfolio’s underlying Bitcoin holdings from early 2021 when the product was closed-end. ETF units tend to hug net asset value so the prospect of the trust’s conversion led speculators to bet on the discount disappearing, which has duly happened.

“Having a long position on GBTC while being short on the CME Bitcoin futures was a popular trade due to the GBTC discount,” said Richard Galvin, DACM’s co-founder. “The trade has paid off, leading to investors selling their GBTC units and closing the CME positions, resulting in a decline in open interest.”

CME and crypto exchange Binance are the pre-eminent Bitcoin futures platforms. The drop in CME open interest is the major contributor to a recent overall moderation in Bitcoin futures activity, Coinglass figures indicate.

Bitcoin has risen about 1% in January, a month of major swings sparked by the rollout of the ETFs. The token topped $49,000 when the products began trading before embarking on a 12-day slide to $38,510. It has pared some of those losses and changed hands at $42,965 as of 6:02 a.m. Wednesday in London.

“We’re now seeing investors put on more long-term and less leveraged positions compared to the end of last year,” said Caroline Mauron, co-founder of digital-asset derivatives liquidity provider Orbit Markets.

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