Bitcoin COT: Hedge Funds Speed Up Short Covering as Asset Managers Pile Into Theirs

What the report shows

In our previous update, published in the Alpha Feed, two trends were taking shape: hedge funds were cutting their net short exposure, while asset managers were shrinking their net long. The October 27 data extends that divergence, while also revealing a shift in how each group is adjusting its positions.

At first glance, the long column might suggest that buying is back: it rose by 421 contracts, while shorts fell by 542. Keep in mind, however, that these columns exclude spreading. Offsetting long and short positions held by the same fund across different expiries are counted separately.

After jumping sharply in the previous report, spreading eased from 2,361 to 1,843 contracts (−518). Buying back the short leg of a spread can make its long leg reappear in the long column, without any new long position having been opened. Once spreading is added back on each side, hedge funds' long positions are virtually flat (−97 contracts), while their short positions dropped by 1,060 contracts.

The move is therefore concentrated on the short side, with total shorts down 8.3%, compared with 1.9% the previous week.

Over the same period, total fund commitments fell from 20,596 to 19,439 contracts (−5.6%), and the number of funds holding shorts dropped from 40 to 37.

The trend that began in early October thus continues for a third consecutive report. The net short has gone from −6,852 contracts on October 6 to −3,979, a 42% decline. It now represents 19.1% of open interest, versus 23.5% a week earlier.

On the standard contract, open interest slipped just 1.2% to 20,791 contracts, or roughly 104,000 BBTC+1.22%. The Micro, by contrast, erased the rebound seen in the previous report: its open interest plunged 17.9%, as Leveraged Funds closed both longs and shorts there. Its weight remains limited, however, at around 3,100 BTC. Across both contracts, the Leveraged Funds' net short shrank by 4,983 BTC.

Asset managers add to their shorts

Last week's contrast holds: hedge funds reduced their net short (+963 contracts), while every other category became less net long. Other Reportables even flipped to a net short (−191), with 285 short contracts appearing. A notable move for this category, but one that remains marginal at the scale of the market.

Among Asset Managers, the net long fell from +2,999 to +2,754 contracts. The decline is slowing, from 17.7% in the previous report to 8.2% this week, but now adds up to 24% over two weeks. Excluding spreading, their longs fell by 108 contracts, while their shorts rose by 137.

This marks the third consecutive drop in longs excluding spreading. The number of managers reporting these positions went from 11 to 9, then to 7, in the space of two weeks.

We had flagged the trajectory of their longs as something to watch. Including spreading, they stopped falling and rose by 87 contracts. Shorts, however, climbed by 332 contracts. For every 100 long contracts, Asset Managers now hold about 46 short contracts, compared with 41 the previous week and 32 two weeks earlier.

Asset Managers remain net long by roughly 13,800 BTC. This week, their reduced net upside exposure therefore comes from heavier shorts, while they are holding on to their longs. Their gross commitments even rose 5.9% on the week, the opposite of what hedge funds did. The narrowing gap between net positions thus masks two very different moves.

ETF inflows lose steam

Last week, the return of ETF inflows was driven mainly by BlackRock's IBIT. This time, net inflows slowed sharply: after $211.2M in the previous window, they dropped to $37.6M between Wednesday, October 21 and Tuesday, October 27.

ETF flows remain a useful gauge for interpreting short covering. As a reminder, a basis trade involves buying Bitcoin on the spot market, often through an ETF, while selling a higher-priced futures contract in order to capture the price gap at expiry. The short then serves as a hedge for the spot position.

Short covering accompanied by net ETF outflows would strengthen the case for these arbitrage trades being unwound. Bear in mind, however, that ETF flows aggregate the decisions of all investors, not just hedge funds.

Over the period covered by the report, from Wednesday, October 21 to Tuesday, October 27, US spot Bitcoin ETFs finished roughly flat.

Behind this near-zero balance, the period swung between heavy inflows and heavy outflows: positive sessions totaled $811.1M in net inflows, against $773.5M in net outflows on negative sessions. On the futures side, hedge funds bought back about 5,300 BTC worth of shorts, or some $420M assuming a Bitcoin price of $80,000.

The absence of net outflows over the period therefore does not rule out basis trades being unwound. Selling by some funds can be offset by buying from other investors. Conversely, a fund can keep its spot position while buying back its hedge, which increases its upside exposure without generating any ETF inflow.

The breakdown of flows also confirms that inflows remain concentrated: IBIT took in $132.4M over the period, while the other ETFs posted combined outflows of $94.8M. Last week's rebound therefore did not broaden out.

Our take

This week confirms the unwinding of shorts, with one notable difference: hedge funds' total commitments are now shrinking. Last week, they were still up 2%. Funds are therefore scaling back their presence on the standard contract, without adding to their longs.

For Asset Managers, the drop in net long alone does not tell the whole story of the week. Their total longs stopped declining, but shorts are taking up more room. The COT still shows no broad-based accumulation of longs.

This edition should, however, be read in light of its timing: since the positions were recorded, market conditions have tightened.

On October 28, the Fed held rates in a 3.75% to 4% range, but two committee members voted for a further hike. On October 30, Bitcoin fell to its lowest level in more than five weeks, around $76,300. Roughly $1.3B in long positions were liquidated over 24 hours across the crypto market, according to CoinGlass data cited by 24/7 Wall St.

These events took place after the COT snapshot, so the October 27 report cannot capture how funds reacted to the decline.

Three things to watch in upcoming reports:

• The October 30 expiry. The report released on November 6, covering positions as of November 3, will be the first to reflect the expiry of the October contract. We will be watching whether the reduction in commitments and in the net short continues past this expiry.
• Hedge funds' reaction to the late-October drop. A quick return toward −5,000 or −6,000 net contracts would point to hedge funds building up their net short exposure on CME futures again.
• Asset Managers and ETF flows. A continued rise in managers' total longs, combined with sustained ETF inflows extending beyond IBIT, would strengthen the case for a return of institutional appetite.