Cryptocurrency traders say negative funding is a buy signal, but is it?

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

While the open interests of the buyer and seller always match, leverage can vary, and since the buyer (buyer) needs more leverage, the funding ratio becomes positive. So you pay the seller fees (shorts).

However, the reverse situation occurs when shorts require additional leverage and this causes the funding rate to go negative.

Cryptocurrency traders say a negative funding rate is a buy signal, but is it?  7th
Weekly funding rate for Bitcoin BTC futures, current. Source: TradingView

Funding rates for Bitcoin (BTC) futures have been negative since May 18 (37 days), and this situation shows that buyers are reluctant to leverage long-term 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 more than a few days, on the other hand, are not uncommon.

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.

Cryptocurrency traders say a negative funding rate is a buy signal, but is it?  9
Bitmex BTC Futures Weekly Funding Rate in 2020. Source: TradingView

Note that from March to November 2020, the weekly funding rate is mostly negative, suggesting that sellers (short sales) are demanding more leverage. The current situation is similar in 2020 and some investors correlate negative funding rates with buying opportunities.

Connected: Data shows that derivatives have little to do with Bitcoin’s decline to $ 29,000

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

However, that analysis almost entirely framed a major bull run that saw Bitcoin price skyrocket from $ 11,000 to $ 34,300. Also, when should you open a position when the negative funding rate can last 60 days?

Cointelegraph previously demonstrated how combining the Funding Rate Indicator with Prime Rate Futures allows for better analysis of professional traders’ positions. The annual basis is measured by the price gap between the fixed-month futures contract and the regular spot market.

Cryptocurrency traders say a negative funding rate is a buy signal, but is it?  11
Base rate of the Huobi 1-month Bitcoin futures contract. Source: Skew

As described above, it may be premature to call the base indicator a low point at the moment, as it has risen near 0% since June 18th.

At the moment, it is impossible to predict when, or the trigger, will cause buyers to gain confidence and eventually the futures market premium will drop to 10%.

For traders trying to catch the falling knife, a better strategy might be to add 25% of a buy position now and raise the bid 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 involves risks. You should do your own research when making a decision.



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