Ethereum’sperpetual-termfundingrateshaverisentolevelsnotseensincethegloballiquidationeventinAugust,raisingconcernsaboutpotentiallong-leveragedliquidations.
Theincident,whichsawmajorcryptocurrencieslikeBitcoinandEthereumfallmorethan20%alongwithstocks,isstillfreshininvestors’minds.DerivativestraderGordonGrantwarnedthatthecryptofuturesmarketremainsvulnerabletosimilarsell-offsdrivenbyover-leveragedpositionsandamixoftechnicalandmacroeconomicfactors.
AccordingtoCoinglassdata,theopeninterest(OI)weightedfundingratereached0.0116%,thehighestlevelsinceJuly29,whenETHwastradingat$3,316justbeforea22%pricedropinearlyAugust.ThecrashwaslargelytriggeredbytheBankofJapan’ssurpriseratehike,whichledtotheunravelingoftheyencarrytradeandapullbackinglobalstockmarkets.Grantexplainedthatwhiletheinitialshockwasexternal,thehighlyleveragedcryptoderivativesmarketmayhaveamplifiedtheimpact.
Grantsaidinaninterviewthatthecurrentstructureoftheperpetualfuturesmarketcouldexposecryptocurrenciestoanothersell-offifthereisanexternalshocksimilartotheyen-carrytradeunravelingthattriggeredtheAugustliquidation.HeaddedthatchangesinmarketparticipantbehaviorandtheriseofhighlyleveragedpositionsposeriskstoETHandothercryptocurrencies.
Granthighlightedadditionalfactorsweighingonthemarket,includingpotentialpullbacksinNvidiaandotherchipmakerstocks,aslowdowninChina’sstockrallyandinvestorcautionoverrisingtensionsintheMiddleEast.Thesefactors,combinedwiththehighleverageinthecryptomarket,couldtriggerorexacerbateasuddenmarketdecline,especiallyifoptions-basedliquidationsaretriggered.
“Thereismorereasontopayattentionwhenbroaderriskassetslikechipstocksaremovinghigherorwhengeopoliticalshocksthreatenequitymarketbetaproxies,includingcrypto,wheretherecouldbeshortgammaexposurearoundtheUSelection,”Grantsaid.
Grantwarnedthatthecurrentfundingenvironmentcouldleadtooverlylongpositionsinperpetualfutures,pushingrateshighertoseeasharpdeclineifliquidationsoccur,similartotheeventsofAugust17,2023.HepointedtoanexamplefromlastyearwherealargeETHoptionstraderwentlongandhedgedwithlongfutures,contributingtosignificantmarketvolatilitywhenunwindsoccurred.
“Therearenowlargershortpositionsthaneverbefore,andthatcanspiraloutofcontrolinapersistentlynegativefundingenvironment,”Grantadded.Withbillionsofdollarsofshortsagainstlongandstakedspotassets,asuddenchangeinfundingratescouldleadtolossesoftensofmillionsofdollarsinamatterofhours,potentiallyforcingpositionstobeclosedandworseningadversemarketconditions,Grantwarned.
*Thisisnotinvestmentadvice.
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