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Retail Versus Institutional: The Fight for Profitability in Bitcoin (BTC)

Originally published on: BTCMANAGER
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June 27, 2019

A CFTC report has highlighted a 14 percent increase in short positions held by institutions and big traders in the CME Bitcoin futures market.

Smaller retail traders are taking the other side of this trade, leading market experts to think there may be a missing piece to the puzzle, as reported by Wall Street Journal, June 25, 2019.

The Big Short

According to the CFTC report, bearish sentiment has kicked in from the big players ever since BTC crossed the $10,000 threshold.

In considering the parabolic manner in which BTC tends to move during bull markets, one would think a short at any point now could backfire.

However, institutions don’t see it this way, as shown from their sentiment changing from bullish to bearish. Whether this is based on their short or long term outlook is uncertain because there’s no way to figure out exactly which investment firms are shorting BTC.

Another theory is that the shorts are hedges by institutions who are long on spot markets. Institutional traders who want to short BTC do not have many options other than CME, as BitMex is not exactly known for offering a top trade engine.

While playing on directional bets, leveraging only longs usually plays out as a better strategy than only shorts. By default, a non-leveraged short will earn a maximum profit of 100 percent, given the asset falls to $0. Longs can give thousand or million percent returns, witnessed by those who held BTC for the past handful of years.

If institutional traders are indeed shorting bitcoin and not using it as a hedge, this could be a significant shift in the power dynamic in financial markets.

For once, the retail side has been active in the space longer than the institutions, and despite a lack of resources to take the kind of positions and execute the analysis a large fund can, they have a lot more experience with bitcoin’s boom-bust cycle.

The launch of the CFTC’s physically-settled futures and Bakkt’s service offering will likely bring colossal levels of liquidity to the market, making price discovery more efficient and leading to better sentiment indicators no matter the side traders bet on.

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