A short trade on Bitcoin last month made a killing for some hedge funds based on data published last week by the Commodities Futures Trading Commision (CFTC).
Near the end of December, when Bitcoin spot was about $16,000, hedge funds sold CBOE XTB futures, betting the price of Bitcoin would fall. And when Bitcoin spot reached about $11,000, the hedge funds closed out their positions, netting about $6 million.
Traders use futures for profiting from either price increases or decreases. Futures are financial contracts between two parties for the delivery of and payment for assets at a future date. One party is long, hoping price will increase and the other party is short, hoping things will go the other way.
In the stock market, you can close out your position by selling the security, but with futures you either hold the contract to expiration, which most do not do, or you establish an offsetting position.
If you think prices will go down, then you would sell futures. When the your position is profitable, then you will exit the position by buying futures.
As of December 26nd, hedge funds sold 1,138 contracts worth about $18 million when Bitcoin spot was about $16,000. Then last week, when Bitcoin spot was $11,000, hedge funds sold about 1,142 contracts, worth $12 million; netting the $6 million in profits.
Taken together, the buying and selling, offset or cancel each other; in effect the hedge funds exited their position. At least that is what appears to have happen given that the number of contracts sold (1,138) is almost the same as the number of contracts purchased (1,142).
What appears to be two sides of the same trade was mistaken by some (WSJ here or here) to be a bullish signal, which was not the case. Some only saw one side of the trade.