Perpetual contracts, also known as reverse swaps, have an implicit rate that is generally charged every eight hours. This rate guarantees that there are no currency risk imbalances.
Although the open interest of buyers and sellers coincide at all times, the leverage can vary, and when the buyers (long) demand more leverage, the financing rate becomes positive. Therefore, it is they who pay the fees to the (short) sellers.
However, the opposite situation occurs when shorts require additional leverage, and this causes the financing rate to turn negative.
Bitmex BTC futures weekly funding rate, current. Source: TradingView
The Bitcoin (BTC) futures funding rate has been negative since May 18 (37 days), and this situation indicates a lack of buyer appetite for long leverage.
Historically, this indicator changes between 0% and 2% per week, although it could maintain higher levels for months during bull runs. On the other hand, a negative funding rate lasting more than a couple of days used to be rare.
However, 2020 provided a different picture as Bitcoin faced an extreme price correction in mid-March, taking 60 days to regain support at $ 9,300. Another nosedive took place in early September when the price stalled at $ 12,000 and would only rebound after 50 days.
Bitmex BTC futures weekly funding rate in 2020. Source: TradingView
Notice how the weekly finance rate from March to November 2020 was mostly negative, indicating that (short) sellers were demanding more leverage. The current situation resembled these periods in 2020, with some investors correlating a negative financing rate with buying opportunities.
Related: The data shows derivatives had little to do with Bitcoin’s slide to $ 29K
Ki-Young Ju, the CEO of on-chain analytics resource CryptoQuant, has shown how historically, a low funding rate “could be a buy signal.”
In this bullish-only, spot-driven market, a low finance rate could be a signal to buy.
It doesn’t seem like a good idea to wait for a correction when institutions buy $ BTC.
Chart https://t.co/yzjLW3MUFD pic.twitter.com/IwolH6kz0c
– Ki Young Ju 주기영 (@ki_young_ju) January 3, 2021
However, this analysis almost exclusively framed a massive bull run in which the price of Bitcoin soared from $ 11,000 to $ 34,300. Also, at what point should a position be opened if a negative funding rate can last for 60 days?
Cointelegraph previously showed how combining the funding rate indicator with the futures base rate provides a better analysis of how professional traders position themselves. The annualized basis is measured by the price gap between fixed month futures and regular spot markets.
Huobi 1-Month Bitcoin Futures Base Rate. Source: Skew
As shown above, calling the bottom of the base indicator at this point could be premature because it has been bouncing close to 0% since June 18.
At this time, it is impossible to estimate the moment or the trigger that will make buyers gain confidence and ultimately bring the futures market premium back to 10%.
For traders trying to ‘catch the falling knife’, a better strategy might be to add 25% of the long position now and scale the bids every $ 2,000 below the $ 30,000 resistance.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.