The financing rate for bitcoin declines, but have traders become pessimistic?

Written by Rock Buivy

Post Date: 26 Feb, 24

Although the price of bitcoin is still declining, $251 million in new money has entered spot Bitcoin ETFs, demonstrating the robustness of the markets.

On February 20, Bitcoin recorded its greatest daily close in more than two years; nevertheless, the $52,500 resistance proved to be a more formidable obstacle than anticipated, leading to a rejection below $51,000 on February 23.

The Bitcoin futures contracts’ funding rate briefly showed an excess of demand for short positions on Feb. 22, sparking speculation of potential further bearish momentum.

Bears have little reason to celebrate, as Bitcoin posted a 33.5% year-to-date gain in 2024. However, some analysts think that the $1 trillion market capitalization at $50,930 may signify a local high.

Even though this level is just a round number and has no intrinsic meaning, the media has focused on it, which could frighten investors.

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Spot Bitcoin ETF inflows will probably control the price of BTC

Analysts and traders have offered a number of explanations for why there might be a correction in the price of Bitcoin.

These include divergences in the Relative Strength Index (RSI), selling Bitcoin-related stocks, a historical lack of bullish momentum 60 days prior to the halving, and the possibility that 2.5% of the supply was probably bought near $51,500.

However, none of these hypotheses should carry weight if the net inflow to the spot Bitcoin exchange-traded fund (ETF) persists.

On Feb. 22, the net inflow on U.S.-listed Bitcoin ETFs amounted to $251 million, reversing the $36 million outflow observed on the previous day.

“In the complex world of Bitcoin corrections, amidst RSI divergences and historical trends, the true compass lies in the flow of the ETF river. Yet, as funding rates fluctuate and market makers dance, the weight of hypotheses fades in the face of trading metrics.”

Since it is nearly impossible to forecast demand for Bitcoin ETFs, focus should instead be on trading metrics to determine whether traders are becoming more pessimistic following several unsuccessful attempts to keep prices over $52,500.

Inverse swaps, or perpetual contracts, have an inherent rate that is updated every eight hours. To put it simply, a negative rate means that short sellers are favouring greater leverage.

The fact that Bitcoin’s 8-hour financing rate last stood over 0.02% (or 1.3% per month) after momentarily turning negative on February 22 indicates that there isn’t much demand for leverage longs (buyers).

Funding rate variations, however, are not unusual as market makers exploit certain snapshot moments to chase profit through rate arbitrage.

The desire for Bitcoin among regular investors is a lagging indicator

In order to verify whether the lack of demand for leverage longs truly represents the state of the market, one needs compare the data to other signs, including the demand for stablecoins in China, which is a crucial indication for retail investors to enter or leave the cryptocurrency markets.

Since February 12, the USD Coin stablecoin premium over the Chinese official yuan rate has been stable at a level above 2%, with a recent peak of 3.5%.

This acts as a trustworthy stand-in for retail money investing in cryptocurrency. Nevertheless, it is undeniable that on January 2, the BTC 8-hour financing rate was above 0.03% (1.9% per month).

As a result, in the 30 days before to February 20, retail traders who used leverage lost the full 30% gain from $40,000 to $52,200.

The patterns of ‘buy Bitcoin’ Google search queries verify that, in spite of the recent increases in price, retail traders are not interested.

Conversely, this data shows that there is still a chance for a fresh wave of FOMO-driven investors to enter the market.

The week of January 9, 2021, saw the highest level of interest in the previous five years, following a 150% increase in the price of Bitcoin in just two months.

This emphasises the idea that bearish sentiment or a lack of interest from ordinary investors are not always present when leverage longs employing Bitcoin perpetual futures are not in demand.

Bullish investors shouldn’t be unduly alarmed by the marginally negative futures financing rate for Bitcoin futures.

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