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  • The average level of the Bitcoin “funding rate” across major exchanges has increased notably from 0.023% to a five-month high of 0.087% in the past 48 hours, according to data source Glassnode.

    “Rising funding rates have in the past been associated with a larger portion of the market utilizing leverage via perpetuals,” Matthew Dibb, CEO of Stack Funds said. “If we see continued overleveraging in the derivatives market, bitcoin (BTC, +3.90%) will be increasingly volatile in the short-term.”

    Calculated every eight hours, the funding rate in effect shows the cost of holding long positions. The metric is used by exchanges offering perpetuals (futures contracts with no expiry) as a tool to balance the market and guide perpetual prices toward the spot price.

    The Bitcoin funding rate is positive (or longs pay shorts) when perpetuals trade at a premium to the spot price. As such, a very high Bitcoin funding rate is often considered a sign of leverage being excessively skewed to the bullish side, or overbought conditions, as Tweeted by market analyst Joseph Young.

    In such situations, a pullback or consolidation can trigger an unwinding of longs, resulting in a deeper drop and a pick up in volatility. “The high funding rate can cause somewhat of a ‘shakeout’ due to increasing margin liquidations,” Dibb said. Holding longs at elevated costs is attractive only if a bullish trend continues without pauses.

    Historical data confirms Dibb’s analysis of the market.

    Bitcoin’s rally from July lows near $9,000 ran out of steam near $12,400 on Aug. 17 as the average funding rate rose from 0.008% to 0.078%. BTC fell back to $10,000 in early September.

    Similarly, the recovery rally from March lows below $4,000 ran out of steam near $10,000 in early June with a sharp increase of the funding rate to 0.123%.

    While the funding rate has increased in the past 48 hours, it’s still short of the peak seen in June.

    Further, the uptick may have been fueled by liquidity providers hedging sell positions in the spot market by purchasing long positions in the futures/perpetuals, according to Patrick Heusser, a senior cryptocurrency trader at Zurich-based Crypto Broker AG. So, the latest surge in funding rates may not be entirely retail-driven.

    Nevertheless, the metric’s rise calls for caution on the part of the bulls, as it indicates overleveraged or overbought conditions. “It’s a first indication that leveraged [traders] are starting to shoot over the target,” Heusser said.

    Bitcoin’s implied volatility is already surging with the one-month gauge currently hovering at 77%, the highest level since July 8, according to Skew. That means the options market is pricing in a rise in volatility over the next month and looks to be preparing for a temporary disruption to the steep rally.

    The cryptocurrencies leader by market value is now trading close to $18,650, having tested dip demand with a fall to levels below $18,000 over the weekend.

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