According to the latest data from market intelligence firm Kaiko Analytics, hedge funds are currently holding a net short position on Bitcoin (BTC) and Ethereum (ETH) on the Chicago Mercantile Exchange (CME).

In a recent research article, the crypto analytics platform explains that this net short position does not necessarily indicate a bearish sentiment towards cryptocurrencies. Instead, it suggests that hedge funds are utilizing a popular trading strategy known as basis trades, which is a type of arbitrage strategy.

When hedge funds are net short, it means that they have accumulated more short positions than long positions in the crypto derivatives markets. However, Kaiko Analytics clarifies that this is likely due to the hedge funds engaging in basis trades. These trades exploit the price difference between two similar assets, in this case, BTC or ETH spot and futures. Hedge funds are currently “long basis,” meaning they are selling futures short while holding spot BTC or ETH.

This strategy helps protect against price fluctuations and guarantees a specific sale price in the event of volatility in the underlying asset. It works best when prices are in a state of contango, where futures prices are higher than spot prices. As expiration nears, the two prices tend to converge.

While Kaiko Analytics doesn’t have the exact data to confirm this, it believes that the massive short positions held by hedge funds are most likely a result of this hedging strategy. These sophisticated traders rarely short without hedging their positions.

At the time of writing, Bitcoin is trading at $69,251, while ETH is valued at $3,750.

Disclaimer: The opinions expressed in this article are not investment advice. Investors should conduct their own research and due diligence before making any high-risk investments in Bitcoin, cryptocurrency, or digital assets. Transfers and trades are done at the individual’s own risk, and any losses incurred are their responsibility. This article does not recommend the buying or selling of any cryptocurrencies or digital assets, nor does it provide investment advice. Please note that The Daily Hodl participates in affiliate marketing.