Is the negative futures financing rate for Bitcoin a portent of impending price collapse?

Written by Rock Buivy

Post Date: 21 Apr, 24

While demand for leveraged long bets hits a six-month low, bitcoin bears are jubilant, and crypto traders on X believe it’s time to go long.

Significant demand for short (sell) positions was seen in Bitcoin futures contracts on April 18, which sparked predictions of additional downward momentum.

Negative market sentiment was fueled by this trend, which was further exacerbated by the absence of inflows into spot Bitcoin exchange-traded funds (ETFs) and anticipation of rising interest rates in the United States.

After six months, the funding rate for bitcoin turns gloomy

Perpetual futures, a kind of derivative that closely mimics the price fluctuations of conventional spot markets, are frequently preferred by retail traders.

Exchanges impose a fee known as the funding rate every eight hours in order to maintain a balanced risk exposure.

When sellers (shorts) want greater leverage, this rate goes negative; when purchasers (longs) want more leverage, it goes positive.

Neutral financing rates typically range from 0.5% weekly to 0.025 per 8 hours. On the other hand, even if they are uncommon, negative financing rates are seen as extremely unfavourable signals.

A decreased desire for long positions is indicated by the BTC funding rate, which noticeably turned negative on April 15 and again on April 18, reaching its lowest points in more than six months.

This change in mood in the market usually manifests itself following notable price changes, as demonstrated by the 13.5% decline in the price of Bitcoin from April 12 to April 18.

Market dynamics frequently demonstrate that the biggest effects happen as bear confidence grows.

For instance, some experts read the double-top formation at $72,000 as evidence that the decline may continue until June.

In general, investors’ aversion to risk has decreased as a result of recent U.S. data indicating stronger-than-expected inflation and solid retail sales.

In March, the Consumer Price Index increased 3.8% yearly, much above the Federal Reserve’s 2% objective. Retail sales also increased by 0.7% year over year.

The Federal Reserve is less likely to lower interest rates, which tends to favour fixed-income assets, in a strong economy.

As noted by Reuters, amid worries about financial difficulties among lower-income households, consumer spending has been underpinned by a robust labour market.

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Bitcoin spot ETF flows determine the mood of the market

According to Farside Investors, withdrawals from spot Bitcoin ETFs totaled $165 million on April 17, the fourth day in a row.

In comparison, both ETFs garnered $484 million in early April despite continuous withdrawals from the Grayscale GBTC fund.

Data indicates that during a period of elevated optimism, Bitcoin bulls may have pulled back on leveraging.

There were seven occurrences in March 2024 where the funding rate was higher than 1.2% weekly.

Days of severe volatility followed by large 48-hour liquidations of $300 million on March 5, $261 million on March 16, and $225 million on March 19 were the result of this.

The bulls’ confidence has clearly suffered as a result of this volatility, especially in light of the 12.3% increase in Bitcoin’s price in March.

“Even though they were right to foresee the market movement, they were obliged to liquidate their assets due to the sudden and severe price swings.” – In the dynamic realm of cryptocurrency trading, vigilance is key. Traders are urged to keep an eye on the Bitcoin options markets as well for a more in-depth knowledge of market sentiment.

There, an increasing demand for put (sell) options generally indicates a shift in focus from bullish to neutral price strategy.

According to recent data, during the last week, there has been a 35% increase in demand for call (buy) options over put (sell) options.

Put simply, there isn’t much in the Bitcoin futures and options markets right now to indicate that things are becoming worse or that a price correction is about to happen.

If anything, the data supports the idea that a long-term pessimistic mood was not sufficiently sparked by the short decline below $60,000 on April 17.

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