Bitcoin shorts drop 82%, hedge funds cut exposure – Rally or more caution?

Leveraged hedge funds have cut their short exposure to Bitcoin [BTC] on the CME Futures from $444 million seen in August to $78 million as of mid-January – A 82% decline that may be bullish or bearish depending on other factors. 

Based on the attached chart, such a decline in short exposure by leverage funds coincided with the local price bottom and, to some extent, may be construed to be somewhat bullish for BTC. 

Bitcoin basis trade craters to 5%

However, leveraged funds’ moves are always zero-sum for Bitcoin as they buy spot U.S spot ETF and shorts CME Futures to pocket the price difference, commonly known as a basis trade or yield.  

This lucrative yield has significantly dropped from nearly 10% to 5% over the past few months as the BTC price dropped by over 30%, making it less attractive. 

According to some analysts, these funds will not only reduce short exposure when the yield becomes less attractive, but they will exit spot BTC ETFs as well. This could likely drive ETF outflows. 

In fact, throughout this week, the ETFs saw a cumulative outflow of $1.33 billion. This reversed the strong demand seen earlier in January, which lifted BTC to $98k. 

But the 30-day average ETF flow flipped negative again, further underscoring overall weak institutional demand for BTC.

Put differently, leveraged funds cutting short positions isn’t enough to rally BTC unless strong spot ETF inflows resume again. 

That said, this week’s risk-off mode from investors was warranted due to geopolitical escalations and the Japanese bond crisis.

What’s next for BTC?

But recent updates have shown these risk factors have substantially eased, opening next week to a less volatile macro week, apart from the upcoming Fed rate decision on the 28th of January. 

One of the biggest risks, Japan’s rising bond yields, has reportedly caught the U.S. Fed’s attention as analysts predict potential intervention to boost the Japanese yen from the free fall. Interestingly, the yen posted its biggest intraday performance on the 23rd of January, following this speculation. 

For BitMEX exchange founder, Arthur Hayes, this mitigation meant only one thing- likely liquidity injection that will likely fuel BTC’s prices. 

A similar positive background for potential recovery for BTC in the short-term was echoed by Swissblock analysts. They highlighted that BTC has left the ‘high risk’ zone ahead of potential Japan mitigation and eased E.U.-U.S. tensions on Greenland. 

The current BTC price momentum and risk landscape, Swissblock added, mirrored the Q2 2025 pre-rally. 

At press time, the crypto asset traded at $89.7k. 

Final Thoughts 

• Leveraged hedge funds have cut short exposure to Bitcoin CME Futures by 82%
• BTC’s momentum and risk environment mirrored Q2 2025 pre-bull run set-up, but ETF demand has eased.