Data shows that AAVE and Polygon (MATIC) dealers are currently paid up to 4.3% per week on long future contracts.
In the crypto markets, traders are usually optimistic, or at least the majority of retail investors are. This creates an interesting phenomenon as arbitrage desks and whales are encouraged to sell futures and buy on regular cash exchanges at the same time.
The graph above shows the incredible 240% gain accumulated in 2021 when Crypto hit a total capitalization of $ 2.58 trillion on May 11th. The 53% correction that followed over the next week hit a low of $ 1.3 trillion and decimated $ 32 billion of open futures positions.
Perpetual futures are automatically rebalanced every day
In contrast to regular monthly contracts, the prices for open-ended futures contracts are very similar to those at regular cash registers. This makes life a lot easier for retailers as they no longer have to calculate the futures premium or manually extend positions just before they expire.
The funding rate allows this magic to occur and is calculated by longs (buyers) when they request more leverage. However, if the situation is reversed and short positions (sellers) are too heavily indebted, the funding rate becomes negative and they pay the fee.
Note that AAVE has had a positive funding rate for most of the past three months, save for a few single 8-hour instances. The typical situation is that leverage longs pay the fee and fluctuate between 8% and 0.30% per 8 hour period, which is 6.5% per week.
On May 19, when the cryptocurrency markets collapsed, AAVE futures open positions fell from $ 200 million to $ 82 million as long positions either closed their positions on stop orders or were forcibly liquidated.
After a few days of trying to stabilize, the 8-hour funding rate for perpetual contracts is now minus 0.10%, which is 2.1% per week. In this situation, shorts (sellers) pay the fee, which creates an incentive for buyers.
A similar pattern was seen in Polygon (MATIC), which lost 62% on May 19 after hitting an all-time high of $ 2.70 the previous day.
At MATIC there were 8-hour periods with a negative 0.20% and lower funding rates, which corresponds to 4.3% per week. While this rate fluctuates tremendously, it creates pressure on short sellers to close out their positions as this reduces their margins.
The opportunity is usually short-lived
A negative funding rate creates a safety net for buyers as there are incentives to gather strength and squeeze the short sellers.
This is the reason why some analysts refer to the negative refinancing rate as a buy indicator. However, as soon as short positions close their positions, the situation tends to level out and the funding rate is neutralized.
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