Data shows that the Bitcoin derivatives market is less crowded
The funding rate for Bitcoin futures contracts has decreased in the past 48 hours on major crypto exchanges. This shows that the futures market is cooling and the upward trend could become more sustainable.
Bitcoin 1 hour price chart | Source: TradingView
What is the funding rate for futures and why does it affect the Bitcoin price so much?
The Bitcoin futures market uses a mechanism known as “funding”. In essence, the funding achieves a balance in the market by offsetting the holders of minority positions.
For example, if there are more buyers or long contract holders in the market, buyers will have to pay the short for part of their position.
Suppose a trader has an open long position of $ 100,000 on Bitcoin and the funding rate is 0.01%. This means that every 8 hours 0.01% of the nominal position size, in this case 100,000 USD, is paid out to the short.
When the funding rates are extremely high, it means that the market is mainly driven by buyers. This increases the likelihood of a long squeeze, which could force buyers to sell their positions if Bitcoin’s price falls.
When Bitcoin hovers around $ 18,800, Bitcoin’s funding rate on the major exchanges is 0.1% to 0.2%. When you consider that Bitcoin’s average funding rate is around 0.01%, this is 10 to 20 times higher than usual.
Since then, Bitcoin’s funding rate has fallen. Some analysts attribute it to institutions using the Time Average Price (TWAP) algorithm. Others believe that the strong short-term pullback that Bitcoin has experienced allows the futures market to pull back.
Either way, the subsidy rates are starting to drop. Bityard and Binance Futures both have a funding rate of less than 0.05% as of November 25, 2020. This is still relatively high compared to the previous funding rate for Bitcoin futures, but has changed significantly.
Traders predict bumpy and volatile road
Sam Trabucco, a quantitative crypto trader at Alameda Research, warning Bitcoin price trend is likely to be volatile in the near future.
“Whatever this ride looks like, I think we can rely on one thing: It will be bumpy. (OK, maybe we can count on the second: liquidation will be involved). “
Bitcoin’s funding rates are higher than usual, there is significant interest in Bitcoin and the futures exchanges are opening interest near record highs.
Bitcoin is also heading for an all-time high of around $ 20,000, making it a critical level of resistance.
Sellers may be interested in actively protecting $ 20,000 from a breakout, which could result in extreme volatility.
For example, Bitcoin topped $ 18,500 on November 25, and then quickly fell again. Trabucco explains: The highly volatile price movements come from heavily leveraged trades:
“You see, quick buys have really increased, as you can expect for something so powerful and quick. Once there is a sudden payout, the ‘apes’ have borrowed. Large debts are penalized.” Dealer said.
According to Cryptoslate