Is a negative financing rate a buy signal? | Bitcoin magazine

Popular Twitter traders often cite negative funding rates as a signal to buy Bitcoin, but does the data support this view?

Perpetual contracts, also known as inverse swaps, have an embedded interest rate that is usually calculated every eight hours. This fee ensures that there is no exchange rate risk imbalance.

While the open interests (OI) of the buyer and the seller always match, the leverage can be different and if the buyer (long) needs more leverage, the financing rate will be positive. So you pay the seller fees (short).

However, the reverse situation occurs when the short side requests more leverage and this causes the funding rate to go negative.

Weekly financing rate of Bitcoin futures on BitMex | Source: TradingView

The funding rate for Bitcoin futures contracts has been negative since May 18th and this situation shows that buyers do not want to use long leverage.

Historically, the indicator fluctuated between 0% and 2% weekly, although it was able to hold highs for several months in bullish phases. Negative financing rates of a few days, however, are not common.

However, 2020 presented a different picture as Bitcoin faced an extreme price correction in mid-March and took 60 days to regain support at $ 9,300. Another decline came in early September when the price leveled off at $ 12,000 and would not recover until 50 days later.

Weekly financing rate of Bitcoin futures on BitMex in 2020 | Source: TradingView

Note that from March to November 2020, the weekly funding rate is mostly negative, suggesting that the shorts are calling for more leverage. The current situation is similar in 2020 and some investors believe that negative funding rates correlate with buying opportunities.

Ki-Young Ju, CEO of CryptoQuant, pointed out that in the past, low funding rates “can be a buy signal”.

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 buying institutions $ BTC.

diagram https://t.co/yzjLW3MUFD pic.twitter.com/IwolH6kz0c

– Ki Young Ju (@ki_young_ju) January 3, 2021

“In this bullish spot and only market, a low financing rate can be a buy signal.

It doesn’t seem like a good idea to wait for a correction as institutional investors are buying bitcoin. “

However, that analysis marks a major bull run that saw the price of Bitcoin skyrocket from $ 11,000 to $ 34,300. Also, when should someone start a position when negative funding rates can last 60 days?

Bitcoin Magazine previously showed how the combination of the funding rate indicator with the futures base rate enables a better analysis of the positions of professional traders. The annual basis is measured using the price gap between the futures contract with a fixed month and the regular spot market.

3 Month Bitcoin Futures Base Rate on Huobi | Source: Skew

As noted above, it may be premature to buy the base floor now as it has risen near 0% since June 18th.

For traders trying to catch the falling knife, a better strategy might be to add 25% long now and extend the bid every $ 2,000 below the $ 30,000 resistance.

Teacher

According to Cointelegraph

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