Hike funding

Bitcoin and Ethereum Funding Rates Remain Negative Despite Market Volatility

The financing rates of Bitcoin and Ethereummajor cryptocurrencies by market cap, remain negative for derivatives traders, suggesting a potential short-term bullish signal.

The Federal Reserve’s recent interest rate hikes and future policy tightening plans have put increased pressure on markets around the world. Last Friday, Federal Reserve Chairman Jerome Powell reiterated his intention to counter inflation with higher interest rates in the near future. Markets reacted strongly to inflation news in May and continued to slowly reach new lows amid a summer of economic turbulence.

The macroeconomic situation has had an impact on the prices of derivatives, which are contracts whose value depends on an underlying asset or group of assets. Derivative prices have kept funding rates generally below zero since May.

Funding rates are periodic payments between traders to bring the price of the perpetual futures contract closer to the price of the index, or the underlying crypto making up the futures contract. A perpetual futures contract is an agreement to buy or sell an asset at a pre-determined price with no expiration date on the contract.

Although it may seem technical, funding rates are designed to show the general sentiment of traders and how they view future market conditions. When funding rates remain negative, it indicates how short traders are or expect the market to fall. When funding rates are positive, it implies that traders are going long or expecting the market to rise in the long run.

BTC: All Exchange Funding Rate Chart Image: CryptoQuant

The example chart above from crypto analytics firm CryptoQuant shows how funding rates below zero indicate that most traders expect lower levels of Bitcoin, while funding rates above zero would show that traders expect higher future prices. Negative funding rates suggest that many market traders are bearish; however, it provides opportunities for potential futures buyers.

Historical graph of ETH funding rates. Picture: Coinglass

Changes in parts of a funding rate can affect market sentiment and opportunity. Interest rates and premiums constitute a financing rate. While the interest rate is often fixed, the premium may be determined by the difference between the perpetual futures price and the index price.

“A negative funding rate indicates that perpetual prices are below the reference price, which means that short positions are paying for long positions”, according to Binance, a leading derivatives trading exchange. In other words, funding rates incentivize traders to buy perpetual futures contracts when the price is below an asset’s index price.

In the current market scenario, the wealth of shorts (sellers) in the perpetuals market has created interest for longs (buyers) as the prices of Bitcoin and Ethereum in the futures market are lower than their current prices. ‘index. Although there are many shorts in the market, the growing premium has created a demand for longs. This demand could potentially create a short-term bullish scenario as traders look to capture value in the perpetual futures market.

As markets continue to struggle with inflation and interest rate threats, shorts will likely dominate traders’ sentiments. This will force premiums to be in favor of buyers to bring financing rates closer to zero. Traders can only hope that market participants are willing to take advantage of the ongoing negative funding rates enough to create a short-term rally in the market. Otherwise, the futures market will likely see a continuation of the funding rate trend.

Disclaimer

The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.

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