Understanding Wall Street’s 500% Short Surge

TLDR

• Ethereum short positions have increased dramatically, rising 500% since November 2024 and 40% in the last week alone, marking the highest level of Wall Street fund shorting ever
• ETH ETFs showed strong performance in December 2024, attracting over $2 billion in new funds, including a record-breaking weekly inflow of $854 million
• Much of the short interest comes from “carry trades” where hedge funds short CME futures while buying spot ETH ETFs to profit from price differences
• Ethereum is trading at $2,661, which is 45% below its all-time high of $4,878 from November 2021, while Bitcoin has reached multiple new ATHs in 2024
• Options data shows bearish sentiment in the short term but more bullish expectations for the longer term

---

Ethereum (ETH), the world’s second-largest cryptocurrency, is experiencing unprecedented levels of short selling from institutional investors. Recent data shows that short positions have increased by 500% since November 2024, with an additional 40% surge in just the past week.

According to data from the Chicago Mercantile Exchange (CME), hedge funds currently hold a net short position of 11,341 contracts, marking the highest level of institutional short interest ever recorded for the cryptocurrency. This positioning represents a sharp increase in bearish sentiment from Wall Street firms.

The surge in short positions comes at an interesting time for Ethereum. In December 2024, ETH exchange-traded funds (ETFs) showed robust performance, attracting more than $2 billion in new investments. During this period, the funds recorded a notable weekly inflow of $854 million, setting new records for institutional interest.

What is happening with Ethereum?

Short positioning in Ethereum is now up +40% in ONE WEEK and +500% since November 2024.

Never in history have Wall Street hedge funds been so short of Ethereum, and it’s not even close.

What do hedge funds know is coming?

(a thread) pic.twitter.com/knsyOhYyyt

— The Kobeissi Letter (@KobeissiLetter) February 9, 2025

Thomas Erdösi, head of product at CF Benchmarks, explains that much of the short interest can be attributed to carry trades. “There is evidence suggesting that a notable portion of the short interest in Ether futures is tied to the carry trade,” he states. These trades involve hedge funds simultaneously shorting CME futures while purchasing spot Ethereum ETFs to profit from price differences between markets.

The current price of Ethereum stands at $2,661, representing a 45% decrease from its all-time high of $4,878 reached in November 2021. This performance contrasts sharply with Bitcoin’s trajectory in 2024, which has achieved multiple new all-time highs.

Market data indicates that approximately $470 million in new short positions correlates with around $480 million in spot ETF inflows, supporting the carry trade theory. This strategy allows institutional investors to profit from market inefficiencies rather than making pure directional bets against Ethereum’s price.

However, not all short positions are related to carry trades. Some hedge funds may be placing outright bearish bets due to Ethereum’s recent market performance. The cryptocurrency has notably lagged behind other blockchain platforms and has shown weaker performance compared to the broader alternative coin market.

Options market data provides additional insight into trader sentiment. Current trends show a preference for put options in the near term, indicating short-term caution among traders. Interestingly, longer-dated options display higher prices for calls, suggesting more optimistic expectations for Ethereum’s future price movement.

The Kobeissi Letter, a market commentary platform, suggests these high levels of short interest could potentially lead to a “short squeeze” scenario. Such an event could drive Ethereum’s price higher if market movements force short sellers to close their positions by buying back the asset.

Recent market volatility has highlighted the impact of these large short positions. Earlier this month, Ethereum experienced a 37% price drop within 60 hours, coinciding with Donald Trump’s proposed trade tariffs on Canada, China, and Mexico.

BlackRock’s iShares Ethereum Trust ETF (ETHA) has emerged as a key player in the current market dynamic. Hedge funds have shown particular interest in trading strategies involving this ETF, often pairing positions in it with CME futures contracts.

The current market structure has created opportunities for institutional traders to profit from basis trades, as Ethereum’s basis occasionally exceeds that of Bitcoin. This dynamic has made Ethereum carry trades more attractive to sophisticated market participants.

Some analysts maintain positive long-term outlooks for Ethereum. Reports from Steno Research suggest potential price targets as high as $8,000 in 2025, with predictions that ETH might outperform Bitcoin during this period.

The large short interest has raised questions about market stability and potential price movements. The Kobeissi Letter notes, “This extreme positioning means big swings like the one on February 3rd will be more common.”

At press time, Ethereum continues to trade near $2,661, showing relatively stable price action despite the record levels of short interest. The cryptocurrency has moved up 0.1% in the past 24 hours, maintaining steady trading volume across major exchanges.