The cryptocurrency market has been trading in a narrow upward channel for the past 10 weeks, indicating that bullish momentum remains strong despite failing to break above the $1.7 trillion market cap resistance. In December, Bitcoin reached highs above $44,000, while Ether’s upswing stopped at $2,400. Some analysts speculate that the excessive demand for leveraged longs could trigger a correction, but is this really the case?
The odds of cascading liquidations are a concern when traders heavily rely on futures markets. Analysts monitor leverage demand to assess the risk of a sell-off driven by derivatives markets. To determine how whales and market makers are positioned, one should analyze the Bitcoin futures premium, also known as the basis rate. Professional traders prefer monthly contracts due to the absence of a funding rate, which causes these instruments to trade higher relative to regular spot markets.
Data shows that the three-month Bitcoin futures premium has remained above the 10% neutral threshold since December 1, indicating excessive demand for long positions. However, the current 15% premium is somewhat expected, given Bitcoin’s 11.5% price gain in December alone. On the other hand, those betting on a price decline currently benefit from a healthy cushion as the futures contract is trading $1,800 above the spot price.
Retail traders, on the other hand, prefer perpetual contracts for leverage. These contracts have an embedded fluctuating rate and their price tends to match the spot markets instead of having a premium like monthly contracts. A positive funding rate indicates that long positions demand more leverage, while a negative funding rate occurs when short positions require additional leverage.
The weekly funding rate for the top five coins, including XRP and Solana’s SOL, has reached a one-year high ranging from 1% to 1.2% in terms of futures’ open interest. While this may sound excessive, most retail traders are looking for short-term gains and can absorb the cost. However, investors’ greed and inexperience in calculating the funding rate cost can lead to exorbitant fees during bull runs.
Judging by the three-month futures premium, there is no impending risk of mass liquidation due to excessive leverage by retail traders using perpetual contracts. It’s important to note that this article is for general information purposes and should not be taken as legal or investment advice. The views expressed here are the author’s alone and do not necessarily reflect the views of Cointelegraph.