Ethereum basis trade strategy surges with rising ETF inflows

The basis trade strategy has made a comeback in the cryptocurrency market, particularly with Ethereum. This approach involves buying an asset on the spot market while simultaneously selling a more expensive futures contract, profiting from the convergence of futures and spot prices as the contract nears expiration.

Recent rallies in August and September triggered short squeezes, which likely pushed up the futures premium relative to the spot market. Subsequent ETF inflows and growing short positions on futures suggest a resurgence of the basis trade, especially for Ethereum.

Data from the CFTC shows a significant increase in short positions on Ethereum. As of August 4, there were 6,128 short contracts, which surged to 13,220 by September 22, a 115.7% increase. In contrast, Bitcoin short positions rose modestly from 11,483 to 12,698, a 10.6% increase over the same period.

From August 3 to September 25, spot Ethereum ETFs gathered around $2.73 billion in net inflows, while Bitcoin funds saw $6.24 billion. This activity aligns with the basis trade strategy, where ETF inflows reflect demand for the underlying asset, and increased short positions on futures correspond to the other side of the cash-and-carry transaction.

Profitability of the basis trade improved significantly in late September, reaching 2.27% annually for Bitcoin and 2.77% for Ethereum. While these returns may seem modest, the strategy is appealing because it is directionally neutral and often executed with financial leverage.

The longer the difference between futures and spot prices persists, the greater the potential for ETF inflows and positive sentiment in the industry. However, a narrowing of this basis could lead to a reversal of the basis trade strategy, as a smaller basis would reduce the incentive to re-enter such trades at the next contract rollover.