• The premium on Bitcoin futures on the CME rises as ETF speculation grips the market

  • Bitcoin’s recent break above $50,000 appears to be supported by renewed institutional buying.

    Front-month bitcoin futures contracts on the Chicago Mercantile Exchange (CME) are currently trading at a 12.8 percent annualized premium to the spot price. According to data from the derivatives research firm Skew, this is the highest since mid-April and represents a significant increase from the 0.36 percent discount seen a week ago.

    According to Arcane Research’s weekly research note published Tuesday, the increase in premium “suggests that there is high demand among CME traders to build long exposure in bitcoin at the moment.” “The CME’s front-month contract is by far the most frequently traded BTC futures contract on the exchange, and bullish tendencies appear to be brewing on the institutional platform right now.”

    Analysts consider CME to be synonymous with institutions. These large corporations prefer to trade futures contracts for any product on an established and regulated exchange, such as the Chicago-based derivatives giant. Furthermore, CME’s regulated standard futures contracts are traded in 5 BTC increments and require significant capital outlay, as is typical of institutional investors.

    Bitcoin was trading near $50,650, up 5.14 percent for the week after rallying more than 10% the previous week. The expectation that the United States will soon approve a futures-based bitcoin exchange-traded fund is one of the main factors driving the cryptocurrency higher.

    Nate Geraci, president of ETF Store, tweeted on Monday that the Securities and Exchange Commission (SEC) could approve the first U.S.-listed futures ETF in two weeks. According to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, there is a 75 percent chance that a futures-based ETF will be approved this month, most likely the ProShares Bitcoin Strategy ETF on Oct. 18. Earlier this month, the SEC kicked the can on three physically backed Bitcoin ETFs.

    “Rumours of a BTC ETF decision later this month are spurring additional demand,” said Matthew Dibb, co-founder and COO of Stack Funds. “Bloomberg believes there is a 75% chance of an ETF this month; however, it is likely to be futures-based.”

    “This rally coincides with the Proshares ETF approval on October 18,” Dibb explained.

    Arcane Research analysts believe that if a futures-based ETF is approved, it will increase buying pressure on the front-month CME futures contract and result in a higher premium.

    This is because the ETF would gain exposure to bitcoin through regulated futures contracts, such as those offered by the CME, rather than by purchasing the cryptocurrency itself. “A futures-backed ETF will simply buy the nearest dated futures contract and roll it at expiry,” Dibb of Stack Funds explained.

    A sustained rise in premium may entice carry traders, resulting in increased demand in the spot market. Carry traders take a long position in the spot market and a short position in the futures market at the same time in order to profit from the eventual convergence of the two prices at expiry. The greater the premium, the greater the return on carry trades.

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