Perpetual contracts, also known as inverse swaps, have an embedded interest rate that is usually calculated every eight hours. This fee ensures that there are no imbalances in exchange rate risk.
Even if the open interests of buyers and sellers match at all times, leverage can vary, and when buyers (long positions) demand more leverage, the funding rate becomes positive. So they pay the fees to the sellers (shorts).
However, the reverse situation occurs when shorts require additional leverage and this causes the funding rate to go negative.
The funding rate for Bitcoin (BTC) futures has been negative since May 18 (37 days), and this situation suggests that buyers are not having an appetite for leverage longs.
Historically, this indicator has fluctuated between 0% and 2% per week, although it could hold higher levels for months during bull runs. On the other hand, a negative funding rate of more than a few days was unusual.
However, 2020 presented a different picture as Bitcoin faced an extreme price correction in mid-March and took 60 days to recapture support at $ 9,300. Another nosedive took place in early September when the price of $ 12,000 stalled and would take 50 days to recover.
Note that the weekly funding rate for March through November 2020 was mostly negative, suggesting that sellers (shorts) were calling for more leverage. The current situation was similar to those periods in 2020, and some investors correlate a negative funding rate with buying opportunities.
Connected: Data shows that derivatives had little to do with Bitcoin’s decline to $ 29,000
Ki-Young Ju, the CEO of the on-chain analytics resource CryptoQuant, has shown how historically a low funding rate “could be a signal to buy”.
In this spot-driven & up-only market, a low financing rate could be a buy signal.
It doesn’t seem like a good idea to wait for a correction when institutions are buying $ BTC.
Diagram https://t.co/yzjLW3MUFD pic.twitter.com/IwolH6kz0c
– Ki Young Ju 주기영 (@ki_young_ju) January 3, 2021
However, that analysis almost entirely framed a massive bull run that saw Bitcoin price jump from $ 11,000 to $ 34,300. And when should you open a position when a negative funding rate can last 60 days?
Cointelegraph previously demonstrated how combining the Funding Rate Indicator with the Futures Base Rate enables better analysis of the positioning of professional traders. The annualized basis is measured using the price gap between fixed month futures and regular spot markets.
As shown above, it may be premature to hit the bottom of the base indicator now, as it has been around since the 18th
Right now it is impossible to predict when or what trigger will lead to buyers gaining confidence and eventually the futures market premium to drop back to 10%.
For traders trying to catch the falling knife, a better strategy might be to add 25% of the long position now and scale the bids every $ 2,000 below the $ 30,000 resistance.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement carries risks. You should do your own research when making a decision.