Trading behavior in bitcoin futures: Following the “smart money”

Dirk G. Baur and Lee Smales

Journal of Futures Markets, 2022, vol. 42, issue 7, 1304-1323

Abstract: The Bitcoin futures market has grown rapidly since its 2017 introduction. Along with enabling institutional traders to access a regulated cryptocurrency product, futures provide a means to improve market efficiency by shorting Bitcoin. We examine trading behavior in Bitcoin futures utilizing the Commodity Futures Trading Commission Commitment of Traders report. Leveraged money traders tend to hold the largest positions, be net short, and their trading behavior plays a key role in the Bitcoin futures market. Our empirical results show that leveraged money traders display market timing ability, largely by adjusting their short positions. It seems that other trader types follow this “smart money” in adjusting their own positions in subsequent periods. We also demonstrate that it is possible to construct profitable trading strategies based on observed variations in leveraged money positions.

Date: 2022
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