Bitcoin’s 4% Drop Cools Overheated Funding Rates, Data Shows – CoinDesk

The 4% drop to $42,000 cooled the overheated crypto perpetual futures market and paved the way for a steady rise through the end of the year.

Perpetuals are futures with no expiration date with a funding rate mechanism that helps tie the prices of the perpetuals to the index price. Funding rates are regular payments of an asset between long (buy) and short (sell) position holders, calculated and collected by exchanges every eight hours. A positive funding rate means that the perpetual contract is trading at a premium to spot prices; Long positions dominate and pay short positions to keep their positions open. A negative interest rate suggests otherwise.

A high funding rate, typically greater than 0.10% (for eight hours), is considered an indication of excessive bullish leverage or overcrowding of long positions.

According to data source Velo Data, funding rates for BTC, ETH and other major cryptocurrencies consistently hit the 0.15% mark in the second half of last week, indicating an overheated leveraged market.

The situation has normalized with the market-wide price drop at the start of the Asian session, leaving funding rates for most coins in a healthy range below 0.1%.

This is a sign that over-indebted traders have been forced out of the market. Funding rates or costs associated with leverage become a liability when momentum falters, forcing over-leveraged traders to exit and leading to a mild bullish/bearish hiccup.

The market-wide decline in notional open interest, or the dollar value locked in open crypto futures contracts, suggests the same. At the time of writing, XLM, UNI, LINK, and XMR have seen double-digit declines in open interest over the past 24 hours.

Open interest in Bitcoin and Ether fell by 1.3% and 6.7%, respectively.