In a recent analysis by cryptocurrency analysis company CryptoQuant, the relationship between Bitcoin price and funding rates was investigated. The study examined the intricacies of funding rates and their potential impact on market dynamics.
Funding rates essentially represent the fees paid between long and short positions in perpetual futures contracts. They serve to ensure that the price of perpetual contracts remains close to the spot price of Bitcoin.
When more traders hold long positions (betting on price increases), the longs pay the shorts a fee to maintain their positions. This scenario, characterized by positive funding rates, indicates bullish sentiment and potential overindebtedness by longs.
Conversely, when more traders hold short positions (anticipating a price decline), the shorts pay a fee to the longs. This situation of negative funding rates indicates a bearish trend and potential overleverage by shorts.
According to analysts, periods when positive funding rates are high can actually create fragility for long positions. If the price falls and margin requirements increase, long positions may be forced to liquidate their positions to avoid losses, pushing the price even lower in a self-fulfilling prophecy.
However, this is not a guarantee. Price corrections can occur without reaching excessive funding rates, and conversely, high funding rates may not always lead to significant long liquidations.
In November 2023, funding rates reached 0.033%, after which prices fell from approximately $37,000 to $35,000. This probably involved some long liquidations, but it was not a major price crash.
According to CoinGlass data, the current funding rates for BTC on Binance are at 0.0166%.
High Bitcoin funding rates could be a warning sign of potential long liquidations. According to CryptoQuant analysts, market watchers should be on the lookout for the 7th largest long liquidation to occur soon. However, it is important to remember that past performance is not indicative of future results.
*This is not investment advice.