Can we use Bitcoins CoT data?

The Commitments of Trader’s has been around in Bitcoin futuressome form since the 1920’s when the U.S. Department of Agriculture started reporting positions on many agricultural commodities such as corn and wheat. In the years since, the CoT has evolved significantly and the report has become one of the most referenced financial reports used by professional traders so they can determine how they should be positioned, based on how other traders ‘view’ a market. 

Within the CoT report, Commercial traders have always been viewed as the whales in the market, with their positions typically accounting for around 60% of the activity in any market, and as they own the commodity being brought to market, they are also viewed as being the traders that know more about a market than anyone else. A quick look at the commitments of traders will tell you that when commercial traders decide they need to heavily hedge against a market rising, or against a market decline, 9 times out of 10 that’s exactly what will happen in that market. They know that market inside out and that’s why seeing what they are doing is invaluable. 

Fast forward to 2018 and financial markets are evolving fast. Crypto currencies have been around for a number of years already and are starting to become more and more mainstream, with Bitcoin being the leader and the first to be offered via the futures market, and with it also comes its inclusion in the Commitments of Traders report. However, with its introduction into the CoT, came some uncertainty as to how useful this information would be for traders. How relevant would the futures positioning be in a market that is dominated by retail traders and traded via its own exchanges? Would there ever be enough volume traded via futures to even make it representative of what really goes on in the world of crypto? These were the questions that needed to be answered before we could begin to use Bitcoins CoT data, but we didn’t have to wait for long to get the answer. 

While it is true there are some very unique characters to Bitcoins CoT positioning that set it apart from more traditional markets, and that the size of the futures market in comparison to the entire Bitcoin market is very small, we can see that there are a small number of very well informed traders using Bitcoin futures in exactly the same way as any commercial traders use the futures markets, they use it to hedge against market moves that will negatively impact them.

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As I said earlier, commercial traders hedge future price, they buy to protect against a price rise and sell to protect against a price fall. Looking at Bitcoins CoT data it is clear when commercial traders have been using the market for protection and when they have not, and what’s even more interesting, is the protection they have been mostly seeking has been to protect against price rises.  

At its inception in April 2018, commercial traders were net short Bitcoin and remained so for 9 months until January 2019, and in fact held no long contracts what so ever during that time, while the price of Bitcoin declined from around $8,000 to $4,000. It wasn't until January 2019 that commercialBitcoin commitments of traders buying the 2019 low traders bought their first Bitcoin futures, and as we can see from the image on the right, this buying peaked at 320 contracts (each contract is 5 Bitcoins), in the first week of February 2019, right before a 5 month rally started that saw the price increase from $4,000 to $14,000.

I'm not suggesting that this level of buying caused the rally, it was only 1,600 Bitcoin, but what is clear, is the people that were doing the buying know the Bitcoin market and knew they needed to protect against a rally.
Interestingly after this rally, commercial positions completely disappeared, with both long and short contracts going to zero, (see image below). Contracts remained at zero while Bitcoin remained mostly locked between $7,000 and $10,000 for almost a year, and it wasn't until May 2020 that commercial traders game to life and started buying into this market once again. At low levels to begin with in May of 2020 while price was below $10,000, and then continuing to buy as price rose towards resistance at $12,500, and buying even more as it broke through this resistance level. Remember this is a very bullish condition, commercial traders buy to hedge against higher prices, if commercial traders are buying at $12,000 and $15,000, its because they see the price going even higher. 

Bitcoin commitments of traders range bound

This pattern of buying and remaining net long stayed in place all through 2020, and the moment I really started to take notice of Bitcoins CoT data was when price reached the old highs at $20,000, and to my amazement, commercial traders not only held their long position, they added to it and took their long position to a new high of over 400 contracts. Viewers on MMCtv will remember how surprised I was at this given the levels price had now reached, but this was very bullish and I was convinced this meant only one thing, and price didn't hang around, breaking through the old highs with ease as commercials continued to buy even more, propelling it to $60,000 in a very short space of time. 

Bitcoin commitments of traders buying at old highs
Looking at where we are now, commercial traders are very much still net long but have eased the number of long contracts and for the first time, a new high in price has not been preceeded by a new high in their long position. This is not a bearish condition on its own, but if their long contracts were to drop significantly once again, this would indeed be a strong indication that they do not see a further surge in price at that point.

The CoT data for Bitcoin may be very new, and at first glance it certainly looks very different to the CoT data for any other market I have seen, but with only 3 years of history one thing is already clear, the commercial contracts in this market are like any other and are being traded by people that really know this market and I for one will be paying very close attention to what they do.  

Happy Trading

Ray Gilmour
Founder & Senior analyst at Markets Made