CF Benchmark Reports: Short Covering in Ether Boosts ETH Price Rally

Ether’s recent surge, despite being significant, lacks substantial backing from new investments. Analysts suggest that the increase is primarily driven by traders closing their short positions rather than an influx of new bullish trades or leveraged buys on markets like the CME.

Sui Chung, the CEO of a cryptocurrency index provider, noted that the ongoing rally is mainly attributed to short covering—where bearish traders buy back their previously sold futures—as opposed to a robust bullish sentiment among investors. This is particularly relevant to derivatives that institutions favor, which are linked to Bitcoin’s reference rate.

When short-sellers cover their positions, they are essentially repurchasing futures contracts that they had sold initially. This buying action creates a temporary uptick in market demand, subsequently exerting upward pressure on prices.

Chung highlighted the persistently low CME futures premium as an indicator that short covering is the primary factor behind the price rally.

While Ether’s spot value has jumped by nearly 90% to surpass $2,600 since a notable sell-off in early April, the annualized one-month basis for CME’s Ether futures has remained stable between 6% and 10%. This data indicates that there hasn’t been significant leverage used to create new long positions.

In a typical scenario, the expectation would be for higher basis levels in the futures market if new leveraged trades were being initiated, Chung explained. This suggests that some price increases may stem from adjustments and minimizing risks, rather than strong new demand.

Some speculate that the unchanged basis is due to sophisticated trading strategies capitalizing on the price discrepancies between CME Ether futures and the spot market by shorting futures while buying spot ETFs.

Nonetheless, this argument appears weak in light of the fact that U.S.-listed spot ETFs have recorded net positive inflows on just ten days over the past month, with inflows exceeding $100 million only once.

Chung emphasized that the limited inflows into ETH ETFs, coupled with the subdued basis, indicates that the recent upward movements do not seem to be the result of new leveraged buying but rather a reflection of market repositioning.