Bitcoin Futures Give Us an Inside Look at the Market
Most investors never touch futures. And they probably shouldn’t.
Futures contracts are expensive. They’re complicated. You can lose a ton of money trading them if you don’t know what you’re doing — even more than you originally put at risk.
You’d be hard pressed to find someone like me recommending them to everyday investors.
But today I want to break that rule.
I do recommend you utilize futures contracts. Just, not as a trade.
The futures market is a far better tool for understanding where the big money’s going than it is for making money.
And just five years ago, a game-changing new futures contract hit the markets…
One that allows everyday investors to see what major institutional players are doing with the world’s fastest-moving asset.
Bitcoin Futures Changed the Game
Futures on Bitcoin were introduced in Chicago in 2017.
This was an important milestone for the crypto market. Futures created liquidity for large funds, and provided access to hedging strategies.
Crypto was no longer just a hobby for tech nerds. It had graduated to mainstream finance. And, more importantly, futures gave us new insights into the market…
See, the government knows who buys every single futures contract. Every week, they share this information in the Commitment of Traders (COT) report.
In it, they assign each contract to one of three groups:
- Small Speculators — advanced but small-scale traders who buy just a few contracts at a time.
- Large Speculators — hedge funds and institutional investors.
- And Commercial Traders — market makers or exchanges which use futures to hedge their risks.
Small speculators are essentially irrelevant. They’re the “dumb money” of the futures market, and their data doesn’t tell us much.
The larger institutions, though, provide useful insight.
So let’s look at how these groups have been positioned on Bitcoin futures over the past year.
The black line at the bottom represents the Large Speculators (hedge funds), and the green line is the Commercial Traders.
I converted the data into an index spanning 0-100. High values of the index are bullish, while low values are bearish.
We can see that during the bear market, hedge funds remained bullish while commercials were bearish. They did spike down to bearish in early November as Bitcoin prices peaked, but have remained bullish ever since.
Recently, too, the hedge funds started to get more bearish as the price of Bitcoin went up, and have returned to bullish now that it’s dropping again.
Between the two, it’s clearly smarter to side with Commercials. They have been, and have to be, correct on long-term trends — otherwise they’d simply go out of business.
Of course, you’d also expect hedge funds to be good traders. But sometimes they fall victim to the same trap as small speculators. They buy stories. And that’s all Bitcoin really is.
First the story was “global currency.” Then it was “store of value.” Then “decentralized finance.”
The story constantly changes, but Bitcoin remains useless.
That is, except for one saving grace…
Bitcoin is likely the best tool for speculation we’ve ever seen.
I’ve been trading Bitcoin with members of my advisory One Trade for the past few months.
Just last month, we turned Bitcoin’s halfhearted rally into a 100% gain in two days… And right now, we have our money in a put option to benefit from a further decline.
I use my own custom indicator to trade Bitcoin. Since COT data lags the latest activity, it’s more useful as a confirming indicator. I double-check it against my trading tools to confirm the trend.
The signal we’re following now came mainly from my indicator — which beat a buy-and-hold strategy by 5 times over a seven-year backtest.
After a similar signal flashed back in April, Bitcoin fell nearly 48% in just two months. Whether the fall will be that severe this time remains to be seen. But it could be.
Keep an eye on the large traders for hints about where Bitcoin could move next.
Regards,Michael Carr, CMT, CFTeEditor, True Options Masters
P.S. If you want to see the profit potential of a 48% down move, go here.
Yesterday I began a limited-time rebroadcast of my Bitcoin research presentation from last month. It shows you everything you need to know to get involved. This will only be up for a limited time, so don’t delay.