The funding rates for Bitcoin and Ethereum, the leading cryptocurrencies by market cap, remain negative for derivative traders, suggesting a potential short-term bull signal.
The Federal Reserve’s recent interest rate hikes and plans for future tightening of policy have placed increased pressure on markets across the globe. This past Friday, Federal Reserve Chairman Jerome Powell reiterated his intent to counter inflation with higher interest rates in the near future. Markets reacted sharply to inflation news in May and have continued to slowly make new lows amid a summer of economic turmoil.
The macroeconomic picture has bled into prices for derivatives, which are contracts whose value is dependent 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 make the perpetual futures contract price close to the index price, or the underlying crypto constituting the futures contract. A perpetual futures contract is an agreement to buy or sell an asset at a predetermined price without an expiration date on the contract.
While this may seem technical, funding rates are designed to show the overall sentiment of the traders and how they view future market conditions. When funding rates remain negative, it indicates how traders are short, or expect the market to go down. When funding rates are positive, it implies how traders are long, or expect the market to go up in the long run.
The sample chart above from crypto analytics firm CryptoQuant shows how funding rates under zero indicate that most traders expect lower Bitcoin levels to come, while funding rates above zero would show that traders expect higher future prices. Negative funding rates suggest that many market traders are bearish; however, this brings opportunity for potential buyers of futures contracts.
Changes in parts of a funding rate can affect market sentiment and opportunity. Interest rates and premiums make up a funding rate. While the interest rate is often fixed, the premium can 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 mark price, which means that short positions pay for longs,” according to Binance, a leading derivatives trading exchange. In other words, funding rates incentivize traders to buy perpetual futures contracts when the price is lower than the index price of an asset.
AD
AD
In the current market scenario, the wealth of shorts (sellers) in the perpetuals market has created an interest for longs (buyers) as the prices of Bitcoin and Ethereum in the futures market are lower than their index prices. Although there are many shorts in the market, the growing premium has placed a demand for longs. This demand could eventually create a short-term bull scenario as traders look to capture value in the perpetual futures market.
As markets continue to struggle with the ongoing inflation and interest rate threats, shorts will likely dominate traders’ sentiments. This will force premiums to be in favor of buyers to push the funding rates back closer to zero. Traders can only hope market participants are willing to take advantage of the ongoing negative funding rates enough to create a short-term rally in the market. If not, the futures market will likely see a continuation of the funding rate’s trend.
Disclaimer
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.
Stay on top of crypto news, get daily updates in your inbox.
A negative balance happens when you buy cryptocurrency or deposit cash into your Coinbase account, but Coinbase doesn't receive successful payment from your bank or card issuer.
What is Funding Rates? Funding rates are the fees set by cryptocurrency exchanges to maintain balance between contract prices and underlying asset prices, typically applicable to perpetual contracts.
You can invest in Bitcoin directly by using one of the major cryptocurrency exchanges, such as Coinbase or Binance. Another way to gain investment exposure to Bitcoin is to buy shares in a company with significant Bitcoin exposure, such as a Bitcoin mining company.
A positive funding rate, where long position holders pay shorts suggests that traders are willing to pay a premium to bet on rising prices, which indicates bullish sentiment. A negative funding rate could mean bearish sentiment with shorts paying longs, suggesting that traders expect prices to fall.
In the Trade History, you can see the funding fee rate and funding fee paid. Please note that when you see a positive fee, it means you have paid the funding fee, while a negative fee means you are receiving the funding fee.
What happens if you lose money in crypto? If you lose money in crypto, you will have to sell your assets to cover your losses. If crypto goes negative, you will still have to sell your assets to cover your losses.
It is not possible for the value of Bitcoin to go into negative numbers, as Bitcoin is a decentralized digital currency with a fixed supply. The value of Bitcoin is determined by market demand and supply, and while its price can fluctuate significantly, it cannot go below zero.
ETH/BTC does have an overnight funding charge (Displayed as Rollover in the Trading Station Platform). The current overnight funding rate is 0% (annually) for short positions and -25% (annually) for long positions and is 3x on Fridays.
The funding rate represents the difference between the mark price of the perpetual futures market and the index price, which is equivalent to the spot market of the underlying asset. The funding rate ensures that the funding mechanism aligns the futures market price with the index price.
Like all forms of currency, Bitcoin is given value by its users, supply, and demand. As long as it maintains the attributes associated with money and there is demand for it, it will remain a means of exchange, a store of value, and another way for investors to speculate, regardless of its monetary value.
However, some estimates can be made based on blockchain data and surveys of Bitcoin holders. According to data from Bitinfocharts, as of March 2023, there are approximately 827,000 addresses that hold 1 bitcoin or more, representing around 4.5% of all addresses on the Bitcoin network.
Can crypto coins go below zero? No, crypto coins cannot go below zero. If crypto goes negative, it will mean that the coin's value has dropped so low that it is no longer worth anything.
Bitcoin's β fluctuates significantly over time. Until 2020, bitcoin sometimes had a negative β and sometimes had a positive β. The average beta over the whole time series is 0.26 and the standard deviation is 0.56, suggesting significant volatility in the β. However, this appears to change significantly in 2020.
Address: Apt. 915 481 Sipes Cliff, New Gonzalobury, CO 80176
Phone: +6773780339780
Job: Sales Executive
Hobby: Gaming, Jogging, Rugby, Video gaming, Handball, Ice skating, Web surfing
Introduction: My name is Carmelo Roob, I am a modern, handsome, delightful, comfortable, attractive, vast, good person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
