Offshore crypto traders remain 'heavily exposed' amid institutional risk-off sentiment, analysts say

Risk-off sentiment hit traders on the CME on Tuesday morning after the record 19-day net inflow streak for U.S. spot Bitcoin BTC -4.095% exchange-traded funds came to an end. Offshore crypto participants remain “heavily exposed,” increasing the potential for near-term long squeezes ahead of key macro events this week, according to K33 Research.

Leverage in bitcoin perpetual contracts has climbed to yearly highs of 260,000 BTC after a steady two-week uptrend, K33 Senior Analyst Vetle Lunde and DeFi analyst David Zimmerman said in a Tuesday report .

“Bullish traders from the past two weeks are currently underwater, with notional open interest having climbed by 32,000 BTC since bitcoin last traded at current prices,” they said.

Traders on the CME de-risked following $64.9 million in net outflows from the spot Bitcoin ETFs on Monday, with annualized futures premiums dropping from around 12% for both bitcoin and ether last week to a low of 6% on Tuesday, the K33 analysts said — levels not seen since May 23.

“While short-time frame positioning suggests cautious behavior among institutional traders, exposure reigns high as open interest sits near all-time highs,” they added.

Spot Bitcoin ETF inflows reflect demand, not hedging

The U.S. spot Bitcoin ETFs recorded a three-month high net inflow of 25,917 BTC ($1.8 billion) last week, Lunde and Zimmerman said, though bitcoin’s price continued to range with relatively low volatility.

Alongside increased open interest, this led to a debate about whether the strong ETF flows are net neutral due to aggressive basis trade activity on the CME, involving arbitrage between spot and futures markets.

“This observation is partly true but far from reflecting the entire picture, as ETF flows have been far more expansive than CME OI developments since May 1. ETFs have added 36,000 more BTC than CME OI since May 1, indicative of a majority of ETF flows stemming from participants aiming to build directional long exposure,” the analysts said.

Meanwhile, bitcoin’s correlation to U.S. equities has reached levels not seen in 18 months, with bitcoin’s 30-day correlation coefficient to the Nasdaq growing to 0.64 last week for the first time since 2022, the analysts noted.

Bitcoin: 30-day correlation to Nasdaq and the S&P 500. Image: K33 .

Macro events are key in the near-term

Some of that trend was evidenced by the market's adverse reaction to Friday's strong U.S. nonfarm payroll numbers, delaying interest rate cut expectations.

Attention is now focused on the U.S. CPI inflation numbers due Wednesday, followed by the Federal Reserve’s interest rate decision which is expected to be held at 5.5%.

“The FOMC dot plot, alongside forward guidance during Jerome Powell’s press conference, is likely to be the most material price movers, as bitcoin has resumed its attentiveness to the market's interest rate expectations,” the K33 analysts said.

The largest cryptocurrency by market cap fell 3.5% over the past 24 hours to $66,878, according to The Block’s bitcoin price page . Ether has returned to underperformance against bitcoin, trading down 4% over the past 24 hours, with the ETH -4.61% /BTC pair pushing back toward 0.052.

However, the K33 analysts reiterated their bullish stance on ether, expecting relative strength against bitcoin throughout the summer, stemming from spot Ethereum ETF approvals .