The demand for Bitcoin (BTC) perpetual futures among leveraged buyers has reached its lowest point in more than six months, a trend that some analysts see as a positive sign. However, it’s important to note that the BTC futures funding rate, which measures the demand between buyers and sellers, is heavily influenced by past performance based on historical data.
The Bitcoin funding rate is a metric that looks backward rather than forward. Exchanges implement a funding rate fee to manage leverage usage, as each trade involving perpetual contracts requires a buyer and a seller of equal size. When buyers are more aggressive, the funding rate becomes positive, indicating that they are paying for leverage usage. Essentially, one side compensates the other, ensuring that the exchange doesn’t carry exposure risk.
Inmortal, a user on the X social network, attempted to link periods of negative funding rates with preceding bull markets. While conducting backtests and analyzing historical data is not an issue, it’s important to consider that these periods varied in length from a few days to over two months. Additionally, external factors may have influenced the price increases and subsequent reversals in the funding rate.
For example, the intervention of Silicon Valley Bank on March 23, which held $3.3 billion in USD Coin (USDC) reserves, had a negative impact on Bitcoin’s funding rate. However, once U.S. authorities announced measures to protect investors’ deposits, Bitcoin’s price recovered the $24,000 support level, and the funding rate turned positive. This shows that relying solely on a single metric to establish cause and effect is not very effective.
Similarly, the funding rate increase in October 2023 coincided with a significant event for Grayscale Investments, which received approval to launch a spot Bitcoin exchange-traded fund (ETF) despite opposition from the U.S. Securities and Exchange Commission. This event led to a federal judge criticizing the SEC’s decision, noting their failure to justify how Bitcoin was different from similar financial products.
Bitcoin’s performance relative to gold has also contributed to bearish sentiment. Since April 12, Bitcoin has struggled to maintain bullish momentum, with some analysts seeing a double-top formation after briefly surging above $72,000 on April 8. The subsequent drop below $60,000 on April 17, along with conflicts in the Middle East and record-high gold prices, has increased the confidence of bearish traders.
The reduced inflows into spot Bitcoin ETFs have also dampened enthusiasm for leveraged long positions on BTC. As institutional investors were a major driving force behind Bitcoin’s rally in March, it’s reasonable to expect a decrease in demand for leveraged longs as market conditions change. Therefore, the BTC funding rate is more reflective of recent price movements rather than a predictor.
To determine whether the reduced interest in leveraged long positions reflects broader market sentiment, it’s helpful to analyze the demand for stablecoins in China. Typically, excessive retail demand for cryptocurrencies leads to a premium of 1.5% or higher for stablecoins compared to the official U.S. dollar rate, while bear markets result in a discount.
The premium for USC Coin (USDC) in China has remained just above the 1.5% neutral threshold, challenging the data from BTC futures funding rates. From one perspective, this suggests that the decline to a low of $59,700 on April 17 did not cause panic among Asian investors. This observation supports the idea that the BTC funding rate may eventually rise as trader confidence returns, rather than the opposite.
It’s important to note that this article does not provide investment advice or recommendations. Each investment and trading decision carries its own risks, and readers should conduct their own research before making any decisions.