The volume of hedge funds shorting Ether CME futures has reached new heights. Is it a carry trade strategy or a clear bearish stance?

Hedge Funds Continue Record Shorting of Ether Futures Amid Complex Market Strategies

Hedge funds have dramatically increased their short positions in ether (ETH) futures on the Chicago Mercantile Exchange (CME), reaching unprecedented levels. This surge has raised questions about the underlying strategies driving these trades.

On the surface, this growing short interest might suggest that market players are betting on ether’s price to decline. However, industry insiders indicate that this increase is largely driven by carry trades, with some short positions representing outright bearish bets on ether.

As of February 4, hedge funds held a net short position of 11,341 contracts in CME ether futures, marking a 40% rise over just one week and a massive 500% increase since November, according to data from ZeroHedge and the Kobeissi Letter.

Thomas Erdösi, head of product at CF Benchmarks—an organization that provides reference rates for CME’s bitcoin (BTC) and ether derivatives—pointed out that carry trades make up a significant portion of this short interest. These trades profit from discrepancies in price between futures contracts and the spot market. Despite broader economic headwinds and ether’s underperformance, U.S.-based ETH ETFs have continued to see consistent inflows, which coincides with the rise in short futures positions. This suggests that the activity could reflect an uptick in basis trading.

Carry trades typically involve hedge funds shorting CME ether futures while simultaneously purchasing spot ether ETFs, such as the iShares Ethereum Trust ETF by BlackRock.

“Hedge funds seem particularly active in this strategy, selling CME Ether Futures while buying ETHA,” Erdösi explained. “At times, Ethereum’s basis has even surpassed Bitcoin’s, making ether a more attractive option for these trades.”

The increased short interest is tied to roughly $470 million in recent short positions, matching the $480 million in spot ETF inflows, further supporting the carry trade theory.

Nevertheless, some hedge funds are likely making outright bearish bets on ether, particularly given its struggles relative to other cryptocurrencies like Solana (SOL). Shorting ether futures can also serve as a hedge against risk in the broader altcoin market.

“It’s not all carry trades,” Erdösi added. “Some short interest likely stems from outright bearish positions, driven by ETH’s lackluster performance, especially compared to programmable settlement chains like Solana and the overall altcoin rally.”

Additionally, ether options data from both CME and Deribit shows a clear bias toward near-term put options, reflecting continued downside sentiment toward ether. Put options are typically purchased by those who expect the asset’s price to fall, reinforcing the belief that some market players remain wary of ether’s near-term outlook.

However, longer-term ETH options show more optimism, as evidenced by a rise in the price of call options, signaling bullish expectations for ether in the future.