Institutions Bet Big On Bitcoin

According to data from the CME Group CME , the world’s largest futures and options exchange, bitcoin futures open interest—expressed in contract terms—grew by at least 100% for eight months in a row continuing through in February 2021. Furthermore, the capital tied up in these contracts grew at an exponential 1,405% annual rate from $156 million at the end of February 2020 to $2.34 billion a year later. This kind of growth is more than three times the heady 425% increase in bitcoin’s price over the last year and a further representation of the unprecedented level of demand for exposure to the asset class among institutional investors.

What’s more, with bitcoin recently setting a new record above $61,000 and priced at $55,341 as of this writing, institutional interest in crypto and derivative products, such as CME futures, are poised to remain at elevated levels and perhaps grow higher.

Long-Short Breakdown Provides Additional Insights

But to truly understand the implications of this expanding adoption and what we could expect as the price rises further, it is important to look beyond topline numbers and understand what is happening beneath the surface. Fortunately, data provided by futures market participants to the U.S. regulator breaks down market participants by category, shedding additional light on the mechanics behind this growing institutional interest. The four groups consist of banks, asset managers, leveraged money and “other” firms under a reporting requirement. 

Interestingly, right now leveraged money, including hedge funds and an array of smaller commodity trading advisor (CTA) firms, hold the largest stake in bitcoin (BTC) futures open interest and as of early March 2021 are net short by a 3:1 ratio—meaning that they as a group are largely betting against the asset. 

Click here to subscribe to Forbes CryptoAsset & Blockchain Advisor

Conversely, CME’s bitcoin bulls largely consist of dealer banks, firms in the “other” category— i.e. corporate treasurys, foreign financial institutions—and the “non-reported” market participants that includes active retail traders. 

That said, the composition of which group is net long or net short varies over time. For instance, recent data suggests that some of the hedge funds that are net short have been reducing their positions, a possibly bullish sign for the asset. 

What Lies Ahead

As if on cue, in a podcast aired on March 5, Mathew McDermott, head of Digital Assets for Goldman Sachs GS , indicated that when the bank reopens its crypto trading desk it will include CME’s bitcoin futures as a direct result of client demand and feedback captured during approximately 300 institutional client interactions. One can only expect the uptake should bitcoin’s price continue to rise.

However, perhaps a more telling sign will be the level of adoption of CME’s other crypto derivative products, including its options contracts and recently-launched ethereum futures, which are much smaller in comparison. Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products, told Forbes that the CME is pleased with the early uptake in its ether futures product, with an equivalent of 695,550 ether traded on its platform already. Regarding the BTC options contract, the CME indicated that it was “designed to help both institutions and professional traders to manage spot market bitcoin exposure” and that nearly 41,000 of these contracts have traded since their launch. 

Now that bitcoin seems to have gained institutional acceptance, as evidenced by the adoption of CME’s bitcoin futures, these other products may be the bellwethers that signal the industry’s longer-term trajectory.

Forbes will continue to report on the latest data coming out of CME and other derivatives providers regularly in the future.