Analysts said speculators are cutting back on positions as the launch of the first U.S. Bitcoin exchange-traded fund fanned enthusiasm and pushed prices to new all-time highs. Total liquidations of long crypto positions topped $700 million on Wednesday, the most since Sept. 20, according to data from
Bybt.com. 

“The market has been leveraged long for a few weeks, so there has been that overhang in positioning,” said Jonathan Cheesman, head of over-the-counter and institutional sales at crypto-derivatives exchange FTX.

Stephane Ouellette, chief executive and co-founder of FRNT Financial Inc., a crypto-focused capital-markets platform, said some of the elation around the ETFs has vanished and the selloff’s been exacerbated by the fact that there is much more leverage available in crypto for retail traders globally than there is in other asset classes.

“We already saw a wave of quite severe leverage come into the space which was evidenced by futures contangos, perpetual swap and peer-to-peer lending rates all spiking around the launch of the BTC ETF,” Ouellette said. “In the last few weeks, for example, we saw monthly and quarterly BTC futures contangos in the 20-to-30% range. While leverage can in some cases get even more extreme, the activity over the last few days has some tell-tale signs of a typical crypto check-back.” 

Eoin Treacy's view

Futures-based funds were originally designed for intraday trading but investors assume they were designed for holding for longer time periods. The embedded loss from rolling contracts in contango ensures futures’ funds fall more during setbacks and rally less during rallies. That guarantees they will underperform their benchmark over the medium term.

The first bitcoin ETF quickly bumped up against the position limits set by the CME. That’s a limiting factor on its growth and suggests the number of funds will need to continue to proliferate in order to continue to increase the overall investor position via futures’-based ETFs.

The other side of that argument is that since the current ETFs are guaranteed to underperform, they represent high-beta plays for short sellers via put options. That selling pressure combined with greater liquidity has the capacity to increase scope for occasional bouts of higher volatility.

$10,000 to $12,000 pullbacks have occurred twice since the May lows. That suggests a sustained move below $50,000 will be required to question the consistency of the short-term advance.