The largest cryptocurrency Bitcoin (BTC) and the altcoin king Ethereum (ETH) saw the price difference in their “next month’s” and “the following month’s” futures contracts reach the highest level since 2021 last week. This situation, known as contango, indicates that the market trend is bullish.
BTC and ETH Display Rare Model Once Again
A rare signal recently emerged in the Chicago Mercantile Exchange’s (CME) BTC and ETH futures market, indicating a strong investor inclination towards taking long positions, or leveraged bullish bets, on the leading cryptocurrencies.
A futures contract is a legal agreement to buy or sell the underlying asset at a predetermined price at a specific future date, known as the expiration date. Futures markets tend to show contango, which is a term used to describe situations where the futures price exceeds the spot price, and the price for more distant futures contracts is higher than that for nearer ones. An increase in buying pressure usually causes contango to widen.
According to data followed by K33 Research, the futures prices for BTC and ETH have recently faced the same situation, with contracts for the next month trading at a significant positive premium compared to the following month’s contracts, a rare occurrence since 2018. The following month’s futures contracts are closest to the current date, while the next month’s futures contracts are referred to as those for the subsequent month.
K33 Research’s senior analyst Vetle Lunde commented on this situation, “There is a very strong bullish expectation on the CME. This indicates that the desire to open long positions has led to increased return premiums.”
The CME futures contracts in question are respectively 5 BTC and 50 ETH in size. At the time of writing this article, the contracts expiring in December are referred to as front month contracts, while those ending in January are called next month contracts.
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The Spread Between Front Month and Next Month Contracts Widens
The weekly spread between the front month and next month BTC and ETH futures contracts recently rose to 1.5% on an annual basis, marking the first occurrence of such a situation since the early days of the 2021 bull market. This pattern has only been seen four times to date; three during bull runs and one just weeks before the coronavirus-induced crash in March 2020. According to Lunde, the contango between the two futures contracts narrowed on Monday but continues to indicate an upward trend:
There was a significant contraction in contango yesterday. An open position of 7,000 BTC in December futures contracts was closed, and a build-up in ETH, having seen a similar pattern to BTC, was erased after reaching an all-time high in open positions last week. […] Return premiums continue to remain in the double digits, indicating extremely bullish investor sentiment on the CME.
Protocol’s co-founder Huf stated that the recent expansion in contango is driven by traditional market players taking long positions. Huf said, “This shows that traditional finance, even if not in spot markets, is predominantly long in futures. We can expect the number of long positions to continue to increase towards a potential spot ETF approval.”
Huf also added that rising futures premiums could rekindle interest in basis trades or cash and carry arbitrage. This strategy involves buying cryptocurrency in the spot market and simultaneously opening a short position in futures. During the 2020-2021 bull run, this strategy was one of the most preferred, protecting investors from extreme volatility in prices while allowing them to profit from the premium.
- Contango in futures indicates a bullish trend.
- Traditional finance shows long position preference.
- Cash and carry arbitrage could gain interest.
