• Spot Bitcoin ETF approval may trigger a slump in future open interest.
• Uncertainties surround the current Bitcoin ETF approval timeline.

The anticipation of a potential approval for a spot-based Bitcoin Exchange-Traded Fund (ETF) by the U.S. Securities and Exchange Commission (SEC) has fueled a remarkable surge in Bitcoin (BTC) futures open interest on the Chicago Mercantile Exchange (CME). Institutional players are positioning themselves, but the euphoria may be short-lived, warns K33 Research. 

The research firm cautions that once the SEC gives the green light, selling pressure could trigger a downturn in both open interest and premium levels.

Record-High Open Interest

On January 9, BTC futures open interest on CME reached unprecedented levels, hitting $6.2 billion or 135,000 in BTC terms, according to data from CoinGlass. This spike follows an almost doubling of CME Bitcoin open interest from 72,000 BTC in mid-October, indicating growing optimism among market players. 

The bullish sentiment is further underscored by the substantial premium of 18.7% annualized to the spot price observed in CME front-month futures contracts, as reported by TradingView data. The surge in open interest is primarily attributed to the growing speculation around the potential approval of the first spot-based Bitcoin ETFs. 

Investors anticipate that these ETFs will be able to hold Bitcoin directly, diverging from the traditional futures-based ETFs. Notably, steady inflows into futures-based Bitcoin ETFs, such as ProShares’ BITO, which holds BTC futures traded on CME, have also contributed to the increased open interest.

K33 Research’s Cautionary Note

Despite the current enthusiasm, K33 Research issued a cautionary note in its market report. The research firm forecasts that the current regime of high open interest and premium levels may not be sustainable once the SEC approves a spot Bitcoin ETF in the U.S. 

K33 noted that approximately 43% of CME Bitcoin futures contracts are linked to futures-based ETFs. As investors pivot towards cheaper spot ETFs, these futures funds would need to close their positions, resulting in a decline in both open interest and premium levels.

According to K33’s analysis, the remaining 57% of CME Bitcoin futures contracts are held by active market participants whose exposure has increased over the past three months. Holding these positions open at the current premium becomes expensive, and K33 predicts that investors will likely seek to realize profits once the Bitcoin ETF receives approval. 

This structural rotation, coupled with the shift towards spot-based ETFs, could create substantial selling pressure, potentially bringing CME’s all-time high regime to an end.

Spot Bitcoin ETF Potential Timeline

Meanwhile, Scott Johnsson, a finance lawyer at Davis Polk, outlined a timeline and approval probabilities for the Bitcoin ETF. According to his estimates, approval orders will be issued post-close on Wednesday, requests for acceleration from issuers will follow on Thursday, and the notice of effectiveness filed by the SEC will be marked on Friday. 

Trading is expected to commence the following Tuesday, with Johnsson assigning increasing probabilities of approval at each stage and a final 100% chance of trading approval. However, the recent compromise of the official X account of the SEC might shift this timeline in ways yet to be determined.

Currently, Bitcoin is down by 0.63% with its price pegged at $45,486, atop a market capitalization of $891 billion and a 24-hour trading volume of $38.4 billion.