BTC Funding Rates Turn Negative For A Short Time, Which Usually Marks A Local Bottom: Van Straten
Bitcoin (BTC) hasn’t dropped below $90,000 since Nov. 18, and continues to fluctuate between $90,000 and $100,000.
Sentiment generally turns bullish when bitcoin approaches $100,000 and investors look to continue the bull market. However, it also works the other way around and as bitcoin heads towards $90,000, as it did on Thursday, investors turn bearish.
Bitcoin will move where the maximum pain occurs, right now that is the cutting period between these two valuations.
Bitcoin derivatives play a large part in these price fluctuations; derivatives such as futures and options make up only a few percentage points of total market capitalization but are becoming more influential in the market.
One metric that traders follow diligently is the futures perpetual funding rate. It is defined as the average funding rate (in %) set by exchanges for perpetual futures contracts. When the rate is positive, long positions periodically pay short positions. Conversely, when the rate is negative, short positions periodically pay off long positions.
During a bull market, bitcoin tends to have a positive funding rate because traders believe the price will continue to rise, but when the market overheats, it tends to run out of steam, and the price starts to fall, which leading to liquidation cascades.
However, the same is true for bear markets as price floors are formed over the years, prices can quickly bounce, leading traders to scramble to cover. At these moments, local bottoms are formed.
On Thursday, Glassnode data showed that the funding rate briefly increased (-0.001%), for the first time this year and only a few times since November. This leads to a leverage flush and a sentiment re-shift before bitcoin returns above $94,000. To compare how weak the negative funding rate was on Thursday, during covid-19 in March 2020, we found the highest negative funding rate at (-0.309%).
A negative funding rate does not always lead to an immediate price rebound or decline, but can be watched along with other price chart tools and technical indicators to develop a market view. Negative funding rates can also signal a continuing bear market rather than an immediate bottom. Similarly, positive rates during a bull market may not mean the market is overheated, but may indicate continued strong demand.
Since 2023, the funding rate has been mostly positive due to bitcoin being in a bull market, but it has had short periods of negative rates, which tend to occur at low prices. This was seen during the collapse of Silicon Valley Bank in 2023, and 2024, before bitcoin rose in the same year.
A floor tends to emerge when the funding rate turns negative and bears become overconfident. The same happens when the bulls become complacent, and the spot price can no longer keep up with the leverage being used. In both instances, traders tend to liquidate, and this time, it’s the bears.
