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A metric from the bitcoin perpetual futures market suggests that some traders may have been in debt during the recent rally to over $ 18,000.
According to data source Glassnode, the average level of the “funding rate” on major exchanges has increased significantly from 0.023% to a five-month high of 0.087% in the past 48 hours.
“Rising funding rates have in the past been associated with a larger portion of the market leveraging perpetuals,” Matthew Dibb, CEO of Stack Funds, told CoinDesk. “If we see continued over-indebtedness in the derivatives market, bitcoin will be increasingly volatile in the short term.”
Calculated every eight hours, the borrowing rate effectively reflects the cost of maintaining long positions. The metric is used by exchanges that offer perpetual contracts (futures contracts with no expiration) as a mechanism to balance the market and guide perpetual prices towards the spot price.
The funding rate is positive (or long pay short) when perpetuals are traded at a price above the spot price. As such, a very high borrowing rate is widely considered a sign of overly biased leverage towards the bullish side, or overbought conditions, as noted on Twitter by market analyst Joseph Young.
In such situations, a pullback or consolidation can trigger a closure of long positions, leading to a deeper decline and a resumption of price volatility. “The high funding rate can cause something of a ‘jolt’ due to increasing margin clearings,” Dibb said. Holding long at high cost is only interesting if a bull run continues unabated.
Historical data validates Dibb’s market analysis.
Bitcoin’s rally from July lows near $ 9,000 sold out near $ 12,400 on August 17, as the average funding rate rose from 0.008% to 0.078%. The cryptocurrency dropped to $ 10,000 in early September.
Likewise, the recovery rally from March lows to below $ 4,000 finished off near $ 10,000 in early June with a sudden increase in the funding rate to 0.123%.
Although the funding rate has increased in the past 48 hours, it is still below the peak recorded in June.
Additionally, according to Patrick Heusser, a senior cryptocurrency trader at Crypto Broker AG based in Zurich, the increase may have been fueled in part by liquidity providers hedging sell positions in the spot market by buying long futures / perpetual positions. In other words, the latest hike in funding rates may not be entirely driven by retail.
However, increasing the metric requires caution on the part of the bulls, as it represents over-indebtedness or overbought conditions. “It is a first indication that he has leveraged [traders] they are starting to shoot over the target, “Heusser told CoinDesk.
According to data source Skew, Bitcoin’s implied volatility is already on the rise with the one-month indicator currently hovering at 77%, the highest level since July 8. This means that the options market is pricing in increased volatility over the next four weeks and looks to be preparing for a temporary break from the strong rally.
The best cryptocurrency by market value is currently trading near $ 18,650, after testing the drop in demand with a drop to levels below $ 18,000 over the weekend.
Disclosure: The author holds small positions in bitcoin, litecoin, XRP, cardano and tron.
Read also: Crypto Long & Short: 4 metrics that show how the current Bitcoin rally is different from 2017
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