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Many prominent traders on their twitter handle are giving signals that the negative rates of bitcoin is actually the buying signal. But is it true or not is the real question.
The price of Bitcoin has been showing a downward rally since mid-May. But the celebrity Twitteratis believe that this is the right time to buy more bitcoin. There is a notion among the traders that negative funding rates give a signal of buying Bitcoin. But does data support this is the real question. Let us take a look at how the market is conceptualised and how the funding rates changed.
Usually, every eight hours, perpetual contracts’ embedded rates are chargeable. They are also known as inverse swaps. This fee which is charged as inverse swaps ensures that there are no exchange risk imbalances.
Irrespective of the fact that the buyers and sellers interest are always matched, leverage can vary. The funding rate turns positive when buyers (longs) are demanding more leverage. Thus, they are paying fees to the sellers (shorts).
However, if the shorts demand more leverage, the opposite situation comes. Hence, the funding rates become negative.
BTC Funding rates
So, now it is understood why the Bitcoin Futures (BTC) funding rates have been negative since May 18. This shows that the buyers are not keen to purchase the asset for leverage.
This is an indicator to predict the prices of the asset. Usually, it shifts between 0% and 2% every week. It can also remain at a higher level for months during the bull run. Whereas, a negative funding rate going more than a couple of days is uncommon.
2020, the downturn
But 2020, showed a different picture altogether. In March bitcoin has to go through an extreme price correction. It took 60 days to come back to $9,300 support. Another downturn took place in early September. The prices dropped from $12,000 and it would recover only after 50 days.
Hence, it can be seen that the weekly funding rate from March to November 2020 was negative, indicating that sellers (shorts) were demanding more leverage. Now, presently the state of the asset is the same as in 2020. There are few investors who correspond the negative funding rate with buying opportunities.
CryptoQuant CEO, Ki-young Ju has explained via taking a note of the 2020 strategy that the current low funding rate could be a nut signal. The analysis given by CryptoQuant shows a massive bull run where the price of Bitcoin has surged from $11,000 to $34,300.
The on-chain analytics firm further argues that at what point one should open a position if a negative funding rate can last for 60 days. If the funding rate indicator is combined with the futures basis rate, it will give a better analysis of the positioning of the traders in the market.
The yearly basis is measured by the price gap between fixed month futures and regular spot markets.
Steve Anderson is an Australian crypto enthusiast. He is a specialist in management and trading for over 5 years. Steve has worked as a crypto trader, he loves learning about decentralisation, understanding the true potential of the blockchain.
