“Smart money” continues to sell bitcoin to “dumb money”, according to the latest data compiled in the U.S. Commodity Futures Trading Commission’s (CFTC) Commitment of Traders report.
Big financial institutions and money managers—with vast research and resources at their disposal—continue to hold positions in the cryptocurrency that will profit should bitcoin prices fall. They have been positioned that way since bitcoin contracts began trading more than three months ago. These institutions are net short some 1,833 contracts of bitcoin futures worth about $20 million on the Chicago Board Options Exchange (CBOE) as of February 27, 2018.
A futures contract is an obligation for the “short” (the seller) to deliver on a set date some underlying instrument—like oil, gold, wheat, or whatever—to the “long” (the buyer). When someone shorts a position, it means the seller is bearish, expecting the price to go down. A buyer who goes long a contract is bullish, anticipating prices will rise.
Each bitcoin futures contract on the CBOE’s futures exchange is worth the equivalent of a single bitcoin. However, bitcoin futures are cash settled, meaning whichever side of the deal loses money has to pay up in U.S. dollars when the contract comes due rather than have bitcoins actually change hands.
All short futures contracts require someone to take the other side. In this case, another category of investors—called “nonreportables” by the CFTC because they don’t need to be classified by the regulator—is long roughly the same amount as the big financial institutions but in the opposite direction. Small-time speculators and other retail types operating on shoestring budgets notably populate the “nonreportables” segment and they are positioned to gain should bitcoin prices rise.
Conducted every week, the Commitment of Traders report shows how different types of market participants are positioned in futures contracts. The CFTC requires firms with 20 or more traders who hold large positions in a commodity traded on a U.S. exchange to report whether they are long or short.
Though just 49 larger institutions—the “smart money”— were counted in the most recent CFTC report, it gives at least some glimpse into how some segments view the cryptocurrency.
Hedge funds and similar type of investors like commodity trading advisors (CTAs) make up the largest “smart money” subgroup taking a position on bitcoin—and they are increasingly bearish on it. Called “levered money” by the CFTC for their frequent use of debt and credit to take on enormous positions in the market, seven in this subgroup were long 1,561 contracts. Yet nine were short 3,741 contracts. The ratio of short contracts to long among them has gone from 1.4 when bitcoin first started trading on the CBOE in December to the current level of 2.4 as of Tuesday, meaning they see more of a downturn ahead.
Large asset managers such as more staid pension funds didn’t hold a position at all in bitcoin futures until mid-February. When they did, they were unanimously negative on the cryptocurrency. As of Tuesday, they were short 104 contracts, though that’s a reduction from the 255 contracts they shorted the week before.
Not all institutions were net short. A set called “other reportables” uses bitcoin futures to hedge positions elsewhere in their portfolios. As the CFTC defines them, “this category includes corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable traders.”
When bitcoin futures began trading, this subgroup was short four contracts for every one they were long. Now the long of “other reportables” outnumber the shorts. Twenty-three such investors are long 1,773 contracts while 10 are short 1,377 contracts. However, since this could be to offset some short positions they hold outside the futures market, their real outlook may not be reflected in these numbers.
But it’s the so-called “dumb money”—the small traders and speculators making up the “nonreportables” segment in the Commitment of Traders reports—that keeps staying bullish and hopeful bitcoin prices will rise in the future.
Every week since bitcoin futures hit the market, this group has been long three or four contracts for each one that they’ve shorted. As of Tuesday, the “nonreportables” are long 2,574 contracts while being short just 741. Still, their total positions are nearly 1,000 contracts lower than they were a month ago, indicating they’re taking fewer and fewer bets in bitcoin futures.
The amount of bitcoin futures trades on the CBOE is minuscule compared to the cryptocurrency exchanges like Bitfinex or Coinbase where actual bitcoins change hands. From its December 11, 2017 launch to March 1, 2018, a total of 269,220 bitcoin futures contracts have traded. That’s only about a third of all bitcoin transactions done on March 1 alone, according to data compiled by CoinMarketCap.
Yet the few data points we have in the nascent market indicate that well-resourced investors aren’t as optimistic about bitcoin as their retail counterparties. And a rule of thumb on Wall Street is that one should never bet against “smart money” because those who do so are called “dumb money” for a reason.